Difference between Cheque and Demand Draft

A cheque and a demand draft, both are the instruments offered by the banks in India to facilitate payments or transfer of funds without cash or internet. Here, we will draw a comparison between the two and help you understand the difference between cheque and demand draft.

Difference between Cheque and Demand Draft

Please go through the following table to understand the difference between cheque and demand draft:

What is a Cheque?

A cheque is a type of payment instrument which an account holder can issue to the bank. This document is a horizontal sheet of paper which carries various details about the bank and branch as well as the account number of the issuer. Issuer has to mention the name to whom the cheque is being issued in favour of (or bearer, in case of a bearer cheque) along with the amount to be paid in words and figures, both.

The payment is made only after the bearer or the payee presents this cheque at the bank.

Types of Cheques

The following are the basic types of cheques in India:

1. Bearer Cheque: Such a type of cheque is payable to the person who presents it to the bank. The name of the payee is not mentioned on on a bearer cheque, and the person presenting the cheque at the bank can cash it.
2. Order Cheque: An order cheque is payable to a specific person or organization, whose name is mentioned on the cheque. Only the person or organization named on the cheque can encash it.
3. Crossed Cheque: A crossed cheque is a cheque that has two parallel lines drawn across its face. This indicates that the cheque can only be deposited in a bank account and cannot be encashed over the counter.

• Account Payee Cheque: An account payee cheque, is a type of cheque in which the payment is to be made only to the payee’s bank account and not to the payee in cash or to any other person or organization. The words “Account Payee” or “Account Payee Only” are written between two parallel lines on the top-left corner of the cheque, indicating that the cheque is not to be paid in cash. This provides an extra layer of security and ensures that the payment goes directly to the intended recipient.

• Cancelled Cheque: A cancelled cheque is one which has two parallel lines drawn across it with words “CANCELLED” written on it. Such cheques are used to provide account details to someone, among other reasons. Such cheques cannot be used for issuing or withdrawing funds. It is recommended to put the entry of every cancelled cheque you use from your cheque-book by writing the cheque number and date – this makes it easy to keep a track of all the cheques till date.
• Banker’s Cheque: A banker’s cheque is a financial instrument that is issued by a bank on behalf of its customers. It is a type of payment order that guarantees the payment of a specified amount of money to the person or organization named on the cheque. These are are considered more secure because they are issued by a bank and are not subject to the same risks of bouncing or being dishonored due to insufficient funds in the issuer’s account.

Suggested Read: How to Write a Cheque?

What is a Demand Draft?

A demand draft is also a payment instrument offered by the banks in India. However, unlike a cheque, a demand draft can only be issued by the bank and not the individual. Also, a demand draft is issued after the payment is made to the bank. This way, chances of demand draft getting dishonoured or bounced are zeroed down completely.

When is a Demand Draft Used?

A demand draft is typically used when a secure and guaranteed form of payment is required, especially for high-value transactions. Here are some common scenarios where demand drafts are used:

1. Payment for large transactions: Demand drafts are commonly used for payment of large amounts, such as the payment for a property, vehicle, or other expensive assets. They provide a secure and guaranteed form of payment, which is important in such high-value transactions.
2. Payment to a third party: Demand drafts can be used to make payments to a third party, such as a supplier, contractor, or service provider. This provides a secure and guaranteed form of payment, and also ensures that the payment is made directly to the intended recipient.
3. Payment for educational or professional purposes: Demand drafts are often used for payment of fees for educational institutions, universities, or professional courses. They are also used for payment of exam fees, admission fees, and other related expenses.
4. Payment for international transactions: Demand drafts can be used for payment in foreign currency. They provide a secure and guaranteed form of payment, and also ensure that the payment is made directly to the intended recipient.

Overall, a demand draft is a safe and secure way to make payments, especially for large transactions or when dealing with unfamiliar or unknown parties. It provides a guarantee of payment, which helps to protect both the payer and the payee.

Also, read more articles related to Cheque:

Cheque vs. Demand Draft: FAQs