Hand over a 100 or 500 note to someone in India. Take a step back and just pause for a few minutes before the final transaction can take place. This is because the first thing that they would most probably do is examine your note closely and carefully to make sure it's genuine. And this would be completely justifiable.
Counterfeit or fake money currency is a huge menace in India. According to the Reserve Bank of India's (RBI) website, 435,607 counterfeit notes were detected in 2010-11 (45, 235 detected at RBI and 390, 372 detected at other banks).
One of the main functions of RBI is to ensure an “adequate supply of clean and genuine notes as required by the public.” And to serve this purpose, it launched a truly valuable initiative called 'Paisa Bolta Hai' (paisaboltahai.rbi.org.in). Under this initiative, RBI has created a series of pictures with clear indicators to spot fake money for the currencies including 1000, 500, 100, 50, 20 and 10, by touching, tilting and seeing the notes.
For example, the picture below clearly demonstrates how to check a Rs. 1000 note:
Picture courtesy: paisaboltahai.rbi.org.in
You can also check the indicators for 500, 100, 50, 20 and 10
The website also offers a very useful FAQ section with tips on what to do if you get counterfeit money from someone, what are the legal provisions governing forged notes, etc.