According to the new law, Indian nationals are permitted to carry cash not exceeding Rs 7,500.
UAE's Central Bank has asked all banks and exchange houses to advise their customers not to carry rupees into India.
The Central Bank also asked banks and money changers to warn their customers of the consequences of failing to do so.
"The penalties stipulated in the new (Indian) law include confiscation of money, prosecution and imprisonment," the bank said in a notice issued on Tuesday.
The bank's directive came in the wake of the Indian Central Board of Excise and Customs (CBEC) implementing a new Law from May that criminalises bringing cash in Indian currency into India, Khaleej Times reported yesterday.
The Indian Embassy in Abu Dhabi too had issued a similar warning to NRIs in March.
According to the new law, travellers to India are strictly prohibited from carrying cash in rupees into India, while Indian nationals are permitted to carry cash not exceeding Rs 7,500.
The law also stipulates that all travellers to India must declare all cash in foreign currencies they might be bringing into India, including the UAE dirham, where its value exceeds USD 5,000.
Foreigners should also make a declaration when the aggregate value of all foreign bills in the form of currency notes, financial instruments, travellers' cheques is equal to or exceeds USD 10,000, the notice added.
According to the Indian Embassy, there is a general misconception that NRIs are allowed to carry Indian currency and there had been some instances when NRIs were found carrying large amounts of Indian currency while visiting home and faced problems at the airport.
"In some cases, the currency being carried by NRIs has even been found to be counterfeit," the Embassy had said.
The Indian mission in Oman too issued a similar advisory after "cases of counterfeit Indian currency involving Omani visitors".
When contacted, Indian Ambassador to the UAE M K Lokesh denied the mission had requested the UAE Central Bank to issue any advisory on the law.
Promoth Manghat, vice-president of global operations at UAE Exchange, confirmed receiving the notice from the Central Bank. "We have already started informing our customers about this law when they come for Indian currency. The new law hasn't had much of impact in the market."
A section of the Indian expatriates feels they should also be allowed to carry a minimum amount of cash in Indian currency for emergency use after landing in India.
However, officials point out that NRIs can exchange the UAE Dirham or any other foreign currencies with the Indian rupee on arrival in India, where there is a better system to check counterfeit Indian currency.