They are highly exposed to threat as anyone can claim to withdraw funds. Sight Demand Draft is payable on demand and the payee can claim the payment as soon as they present it at the bank. This type is commonly used for quick and immediate payments, making it suitable for transactions where promptness is required. Once the payee’s name is written on the cheque, it cannot be changed or altered.
Increased Cost due to Bank Issuing Charges
Demand drafts are usually obtained by depositing funds with the bank and requesting the issuance of a draft payable to a specific individual or entity. Cheques offer various advantages over demand drafts for the payer (drawer). Firstly, the payer can postpone payment until the cheque is presented for clearance.
In this article, we shall explore the difference between cheques and demand drafts. Since the bank prepays demand drafts, there’s no risk of bouncing due to insufficient funds, unlike cheques, which depend on the balance in the drawer’s account. As per the RBI rules, demand drafts of ₹20,000/- and above are issued with account payee crossing.
Cheque or check refers to the financial instrument, used for making payment to a party. It is drawn on a certain banker and is not expressly declared to be payable otherwise than on-demand. It has to be presented to the bank for payment, by the payee or holder of the instrument. In case the drawer’s bank account does not have sufficient balance, the cheque is not cleared and the payee does not receive the money – termed as cheque bounced or cheque dishonored. This article looks at meaning of and differences between two types of negotiable instruments – cheque and demand draft. They offer greater safety and convenience with no chance of payment failure, and they cannot be counterfeited, and the funds are already deposited by the drawer with the bank.
This type of demand draft offers the drawer or the owner of the account to determine any specific time, at which the funds can be withdrawn within the time limit i.e. 3 months of validity. There is no change in image as both have the same demand draft paper even they differ in functions. These open cheques can be transferred to the payee to his/her bank account directly. These cheques do not have the two parallel lines cut on the top left side of the cheque.
Definition of Demand draft
Furthermore, they carry no transaction limits and provide proof of payment anytime you use them. Although digital payments are becoming the norm, cheques and demand drafts still serve as reliable alternatives for those who prefer paper-based transactions. In both instruments, the payment is authorised by the payer but facilitated by the bank. With a cheque, the drawer’s signature authorises the bank to release funds, while with a demand draft, the payer must provide funds upfront to the bank, which then guarantees the payment. If a draft is lost or stolen, the process to stop payment and request a new draft can be time-consuming and may incur additional costs.
In Banker’s cheque, the chances of dishonor are not possible because its mode is prepaid. It is difference between cheque and dd always pre-printed with the words ‘not negotiable’ which means it cannot be further negotiated. Also, the payee has to bear some governmental identification to withdraw funds. These are the parties usually involved in cheque withdrawal procedures.
Banking Awareness Study Notes : Types of cheques
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Difference between a Cheque and a Demand Draft
- Cheques and demand drafts are distinct payment instruments with their own advantages and disadvantages.
- Read on to find out the key differences between a demand draft and a cheque.
- The bank will issue a demand draft only on once the payer makes payment of the amount – this can be paid by debit to the bank account of the payer or even by cash.
Demand drafts are payable on demand and can only be deposited in a bank, not cashed by the bearer. The drawer requests the DD, the drawee is the bank, and the payee is the recipient, making them ideal for large transactions or when trust is required. Cheques can only be issued by individuals or businesses that hold specific types of bank accounts, such as Savings, Current, Cash Credit, or Overdraft accounts. This ensures that the drawer (account holder) has a legitimate account with the bank. Whether it is a banker’s cheque or a demand draft, the validation period of the two instruments is 3 months, i.e. after the expiry of three months, the instrument is of no use.
Choosing between bankers cheque vs demand draft might be a critical choice when it comes to financial operations. Both choices provide safe payment methods, but they vary in terms of availability, issuance, and usage. To make an informed decision, let’s examine the differences between bankers’ cheques and demand drafts. Cheques and demand drafts serve as essential financial instruments, but differ in key aspects. Cheques offer flexibility and convenience but come with the risk of bouncing, while demand drafts ensure guaranteed payments, making them more secure.
Therefore, if the cheque is issued to the payee as a gift, or to lend money, he/she cannot sue the drawer, on those grounds. Convenient and easy to handle cheques are available to process more than millions of transactions on a daily basis. This cheque is applicable for everyone as, whoever bears the cheque can encash without any interruption.
- They are also more secure as the funds are prepaid, reducing the risk of fraud.
- This type of cheque can be used to pay a specific organization or a person.
- A cheque is known as a negotiable security because it can be exchanged for cash.
- The customer provides the necessary details, including the payee’s name and the amount to be paid, to the bank.
- Since it is not always possible to give the money in cash to another person or party, they are popular for doing the payments.
While cheques are more commonly used for day-to-day transactions, demand drafts are preferred for more significant financial dealings. Cheques and demand drafts are commonly used financial instruments for making payments. Both serve as alternatives to cash transactions and offer convenience and security.
Demand Draft are of two types— Sight demand draft and Time demand draft. CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.
It is typically used in business transactions where the payee agrees to receive the payment after a certain period. This type is preferred when parties want to schedule payments for a future date, allowing for better financial planning. A demand draft is an instrument issued by the bank in favour of the beneficiary and used for the transfer of money.
