A demand draft or DD is a payment instrument commonly used in India. DDs are pre-paid negotiable instruments, upon presentation by the payee, the drawee bank undertakes the responsibility of making the payment.
The DD must be provided in the bank branch concerned or for it to be picked up through the clearing process to receive the payment.
What is a Demand Draft?
Demand drafts are a type of negotiable instrument issued by banks. An instrument that is negotiable guarantees a certain amount of payment and identifies the payor. A negotiable instrument cannot be transferred to another individual under any circumstances. This type of instrument is known as a Demand Draft.
- The bank issues a draft to a client (drawer), instructing the bank to pay a specific amount to the payee in another bank or own branch
- Demand drafts are comparable to cheques, however, they are more difficult to counterfeit and more secure. Since a demand draft must be paid before it can be issued in the bank, while a cheque may be issued with or without adequate funds in the account. Cheques are therefore subject to bounce, whereas drafts ensure that payments are made on time and in full.
- The demand drafts will be payable on demand. An instrument can’t be paid directly to the bearer but must be presented to the branch by the beneficiary. It can also be collected by the bank’s clearing mechanism.
- Demand drafts are typically issued in situations in which the parties are unfamiliar and distrustful. It is particularly useful in such situations because fraud and counterfeiting are virtually impossible
How Demand Draft Works?
No matter whether a person has a bank account or not, they can make use of the draft facility. A demand draft can be issued by anyone who wants to pay a specific amount to an institution or someone with proof of payment. The individual can either visit the bank and request a draft form, or they can fill out the form online. A cheque or cash can be used to pay the amount mentioned in the form.
Types of Demand Draft
Demand drafts are divided into two categories:
Sight Demand Draft
DDs of this type are approved and paid only after certain documents are verified. If any of the required documents are not presented, the recipient will not be able to receive any funds.
Time Demand Draft
Time DDs are only payable after a specific period, before which they cannot be withdrawn from banks.
How to Cancel Demand Draft?
If you submit cash or a check to the bank for issuing a draft, the bank will accept it immediately. If you wish to cancel the draft, you must visit the bank as there is no online facility. You may cancel the DD in two instances, depending on the payment method you used.
- Mode of Payment – Cash
To receive a refund, you must submit the original draft as well as the receipt to the bank.
- Mode of Payment – Cheque
In case you paid the amount by check and the amount was deducted from your bank account, you will need to submit the original draft with a properly completed cancellation form for the amount to be credited back to your account.
Regardless, you may be in trouble if the postal service has missed the DD or if you have lost it. Due to this, the bank requires proof of the instrument’s issuance. With the assistance and cooperation of the bank, it may be possible to obtain a copy of the draft receipt and initiate the cancellation process.
Demand Draft Cancellation Charges
A cancellation fee for Demand Drafts depends on the method of payment used to issue the Demand Draft.
- If the Mode of Payment is Cash then the Bank may deduct Rs 100 to Rs 150 as cancellation charges.
- If the Mode of Payment is Cheque then the Bank may charge Rs 150 as the cancellation charge of Demand Draft.
When Demand Draft will be Used?
Demand drafts are commonly used when purchasing items online or by phone. It may also be used when your bank account is regularly debited by recurring payments, for example, bill payments.
The payments are also used for return item fees, payments made by customers remotely, and transfers between different bank accounts. Thus, demand drafts are typically accepted by telemarketers, utility providers, credit card companies, and insurance providers.
Demand Draft Validity
From the date of issue, a draft is valid for three months. If the draft is not presented to the bank, it will expire after that period. Even though the money has expired, it will not be refunded to the drawer’s account. A draft must then be revalidated by the drawer with the bank. A crucial point to note is that the payee or any other individual cannot approach the bank for revalidation of the DD.
To revalidate the draft, the bank verifies the original details and extends its validity for a further three months. A revalidated draft, however, cannot be revalidated again.
Why is a demand draft preferred over a cheque?
Governments and educational institutions always prefer demand drafts because they have a high level of value. The drawer must make the specified payment to the bank before issuing the draft, and this acts as a guarantee that the promised sum will be received. On the contrary, even the A/C Payee cheque does not guarantee that a payment will be received by the recipient. Cheque fraud occurs in millions of instances.
Frequently Asked Questions
Is a bank account necessary to obtain a demand draft?
The banks issue demand drafts regardless of the bank account of the drawer. A Demand Draft can be issued against money paid by cheque or in cash. For the issuance of a Demand Draft through a cheque, a bank account is required.
Are there any instructions from the Reserve Bank regarding demand drafts exceeding Rs.20000?
Banks have received instructions from the Reserve Bank of India (RBI) to address the problem of unscrupulous elements approving fake demand drafts. In order to comply with the instructions, all DDs over Rs. 20,000 must be crossed by the account payee.
How should a duplicate demand draft be issued?
A bank may also issue a duplicate demand draft if a demand draft is misplaced or lost. A small fee will be charged by the bank, resulting in the cancellation of the existing draft and the issue of a new one. If the demand draft is worth less than Rs. 5,000, a bank may issue it based on adequate indemnity without requiring an NPA (Non-Payment Advice).
What is the maximum amount of cash payment that can be accepted for the issuance of a draft?
The Reserve Bank of India has instructed banks not to issue demand drafts for amounts exceeding Rs. 50,000 in cash. Therefore, banks are restricted from issuing demand drafts in excess of Rs. 49,999.