Cancelled Cheque – What Is It? When Do You Need It?

A cheque is a negotiable instrument that orders the bank to pay a specific amount from the bank account of the drawer to whomever it is issued or to the order of the specified person or the bearer of the cheque. Three parties to a cheque are:

Drawer of the cheque :  The person who signs the cheque or orders the bank to pay a specified sum of amount through a cheque is known as the drawer.

Drawee of the cheque:  The bank which is ordered to pay the specified amount as per the cheque is known as the drawee of the cheque.

Payee:  The person to who the bank is ordered to pay the amount is known as the payee.
There are different kinds of cheque like open cheque, self-cheque, bank cheque, crossed cheque, stale cheque, cancelled cheque, etc.

It has modernised on how the banking sector works too. Internet banking provides facilities that eliminate the need for customers visiting the bank branches for services such as money transfer, cash withdrawal, and others.  This Cancel check is different from bankers cheque. This has considerably reduced the use of cheque books, deposit slips, and other paper forms that were an essential part of banking services earlier. However, you must know what a cancelled cheque signifies and the situations a cancelled cheque can come handy.

Know to check PF Balance

When would you need a cancelled cheque?

You may have to submit a cancelled cheque in the following cases:

Mutual Funds:

If you are investing in mutual funds or the stock market, you must open a Demat account. The company would want you to submit a cancelled cheque to open the account to verify if the bank account associated with the investment is yours in reality. The requirement of the cancelled cheque is in accordance with the Know Your Customer (KYC) guidelines.

EMI:

Equated Monthly Instalments (EMI) is the most sought after method of payment when you are buying a gadget or a high-value item. Individuals pay monthly instalments even in the case of loans such as car loan, home loan, education loan, and personal loan. To initiate the process of monthly instalments, you must submit a cancelled cheque as proof of having a bank account.

Electronic Clearance Service:

An electronic clearance service automatically deducts money from your account every month for any transaction you have done. In this case, you must set up the electronic clearance service.
Provident Fund Withdrawal: Companies generally ask for a cancelled cheque when you want to withdraw your EPF money.

Insurance Policy:

A cancelled cheque is required even when you are purchasing an insurance policy.

Uses Of A Cancelled Cheque

A cancelled cheque cannot be used to withdraw money, but it can be used for several other purposes. Few of the purposes for which a cancelled cheque is used are:

Know Your Customer (KYC) –

Cancelled cheques are useful for different procedures of KYC while investing in mutual funds or the stock market as there are pertinent details including the proof that the individual concerned holds an account in the bank, the name and account number of the account holder and the name and branch address of the bank in which the individual holds an account.

EQUATED MONTHLY INSTALLMENTS (EMI) –

EMI options are present in various loans, including car loans, education loans, home loans, etc. The bank or the company concerned would require a cancelled cheque for completing the formalities to assign such monthly payment methods.

DEMAT ACCOUNT –

A demat account is used to hold shares by individuals in an electronic form, and at the time of opening a demat account, a cancelled cheque along with a form for opening account and other KYC documents such as proof of identity, proof of address, etc. need to be submitted to the stock brokerage.

WITHDRAWAL OF EMPLOYEE PROVIDENT FUND (EPF)

 A cancelled cheque is required to be submitted while withdrawing money from the EPF to verify account details of the person who withdraws.

OPENING A BANK ACCOUNT –

While opening a bank account, a cancelled cheque is required to be submitted for the process to be completed.
INSURANCE POLICIES– While opting for an insurance policy, some organizations require a cancelled cheque from the person willing to purchase such a policy.

How to Write a Cancelled Cheque?

Cancelling a cheque is important as cheques can otherwise easily be abused. If you are cancelling a cheque to submit it for a particular purpose, the following steps should be followed:

Step 1: Take a fresh cheque from your cheque leaf that you wish to cancel. Do not sign anywhere on the cheque.

Step 2: Draw two parallel cross lines across the cheque.

Step 3: Write “CANCELLED” between those two lines in capital letters.

It is important to note that the parallel lines that you draw across the cheque does not cover any important details such as the account number, the name of the account holder, IFSC code, MIRC code, name and branch address of the bank in which the account exists, etc.

If you wish to cancel a cheque because of any error that you might have made in the cheque, you can start from step 2 of the process as mentioned above.

Nobody can withdraw from a cancelled cheque, but many fraudulent activities can occur even while misusing cancelled cheque. When you provide someone with a cancelled cheque, ensure that you do not put your signature on it, and also ensure that you hand it over to the proper person in charge of collecting it to be on the safer side.

Is it Necessary to Sign a Cancelled Cheque?

One must always be aware of the fact that the submission of the cancelled cheque is only considered if it is a personalized cheque; non personalized cheques aren’t acknowledged for submission. Also, the prime motive of a cancelled cheque is to confirm the IFSC/MICR codes or Account Numbers only. Looking at both these cases, there isn’t any requirement or need to sign the cancelled cheque.

Cancelled Cheque Different from Bounced Cheque

If you have already got the answer to ‘what is cancelled cheque?’, then it would be easy to differentiate it from a bounced cheque.

A situation of cheque bounce is focused to define an unsuccessful processing of an issued cheque with an aim for money transfer due to varied reasons.

One of the primary reasons for cheque bounce is insufficient funds (NSF) managed in the issuer’s account. Under such a situation, banks dishonor or return the cheque, with the imposition of a particular charge. It is crucial to note that, passing of bad cheques is counted illegal and the crime can grow intense depending on the amount involved.
On the other hand, a cancelled cheque is a manual and self-managed issuing of a ‘proof’ document which serves different banking purposes apart from direct cash transactions.

What Happens after your Cheque is Dishonoured?

Since cheque bounce is considered as an illegal act, different financial bodies in India do charge a specific amount to the remitter. However, there are situations when the beneficiary/payee is also part of the charges imposed for the mistake.

For example, if you have written a check for an appliance store and the check gets bounced. Here the store is offered the right to redeposit that cheque along with the bounced cheque charge. Later, the consequences would be faced by you as well, since the report when submitted to the financial bureaus can make it hard for you to open savings and current accounts in the near future.

FAQs

Q.1: Can a cancelled cheque be used multiple times?

Ans. Yes, same cancelled cheque can be used multiple times.

Q.2: Can I cancel the cheque using red ink?

Ans. You should always use a black or a blue ink to cancel the cheque. No other colours are accepted.

Q.3: Why do employers ask for a cancelled cheque?

Ans. It is needed to update the bank account in which salary will be credited.

Q.4: Can a cancelled cheque be misused?

Ans. Even though a cancelled cheque is used for validating purpose. It can still be misused by fraudsters.

Q.5: What should you do with a cancelled cheque once the purpose has been fulfilled?

Ans. After using the cancelled cheque, you must shred it so that it cannot be misused.

Q.6: What is the validity of a cancelled cheque?

Ans. A cancelled cheque can be used till the time details mentioned in the cheque are valid.

Conclusion

A cancelled cheque is a method to ensure that no one can access your account in a fraudulent way. A cancelled cheque still contains information such as your bank account number, account holder’s name, IFSC code, MICR code, name of the bank, etc. Always make sure that you do not fix your signature on a cancelled cheque, otherwise it might become easier for fraudsters to replicate the same. However, in case someone mandates the requirement of a signature on the cheque leaf obtain, a statement or declaration in support of the same.