A cheque is a financial instrument used by banks. It instructs the bank to pay the amount stated on the paper from the drawer’s account. But digital transactions are becoming mainstream. You can now handle tasks like money transfers and withdrawals online.
A cancelled cheque is a validation that you have an account with that specific bank. The document can be necessary when applying for loans, investing in mutual funds, or buying high-end products on EMI.
The article will examine a cancelled cheque, its purpose, and how to write one.
What is a cancelled cheque?
A cheque with two parallel lines across its body with the word ‘cancelled’ between those lines is a cancelled cheque. You don’t have to write anything or sign this type of cheque.
Every leaf in your chequebook has details like:
- Bank name
- Branch details
- Account number
- IFSC code
- MICR code
- Cheque number
If any financial institution, employer, or business wants to verify your bank details, they can ask to see a cancelled cheque. But, giving out a blank cheque is not a wise decision. This is because there are chances of cheque misuse.
So, how do you safely share your banking information? Cancelling your cheque is the answer to this question.
Once a cheque has “cancelled” written on it with two parallel lines on either side of the word, no one can use it for any other purpose. But the details available on the cheque are valid. So, any third party can use the same cheque to carry on with their verification process.
Why do you need a cancelled cheque?
The primary purpose of a cancelled cheque is to verify if you have an account with that particular bank. One can use it to check details like account numbers and IFSC codes.
There can be several instances where a third party might ask for such a cheque. Let us look at them in detail below.
Know Your Customer (KYC)
KYC is a mandatory verification process to be carried out by financial institutions. The aim is to verify a customer’s identity. It also aims to prevent illegal activities like financial fraud, identity theft and money laundering.
The Reserve Bank of India has made KYC necessary for individuals wanting to take part in financial transactions. Examples include opening a bank account or trading stocks.
A cancelled cheque can help verify your details, establish your customer identity, and complete the KYC process.
Open a Demat Account
If you want to invest in mutual funds, trade stocks, or buy bonds, you first need a Demat account. The account holds your securities, like stocks, in an electronic format.
The benefit of owning a Demat account is that it handles the risks of paper-based certificates. You can lose these certificates; they can be stolen or tampered with. The account helps to store your shares and funds in one place securely. It also makes the transfer a seamless process.
So under the KYC guidelines, a cancelled cheque is required to verify your details before opening a Demat account.
Equated Monthly Installments (EMI)
EMI is a type of payment method. You will make regular payments to the lender to repay a loan within a specific time frame. For example, you can make EMI payments to buy a high-value product, make credit card bill payments, or repay a personal, education, or home loan.
As the company lets you have a high-value product or the financial institution is lending you a big amount, they need to verify your details.
And again, a cancelled cheque is one of the documents the company and bank can use for verification.
Electronic Clearance Service (ECS)
An ECS facilitates electronic money transfers from one bank account to another. Organisations or individuals can use ECS.
In the case of organisations, ECS can be used to pay salaries, pensions, or dividends. For individuals, ECS can be used to make bill payments, EMIs, or periodic SIP investments.
When you use your bank account for ECS, the set amount will be debited from your account periodically. So, to set up this process, the bank will need a cancelled cheque from you.
Employee Provident Fund (EPF) Withdrawal
EPF is a scheme where one accumulates retirement benefits. The Employees’ Provident Fund Organization (EPFO) offers this scheme.
You can withdraw money from EPF once you reach retirement age. Or it could be for other reasons like home loans, job loss, marriage, and investment in Varishta Bima Yojna, among others.
EPF withdrawal has become hassle-free as the process is now available online. When raising a withdrawal request, you must upload a cancelled cheque with your name printed. The cheque is used for verification as the money will be transferred to that particular account.
There are various types of insurance policies available in India. For example, you can buy life, health, car, or property insurance.
Depending on the policy terms and provider, you could make a one-time payment or opt for a monthly, quarterly, or annual premium payment. For these periodic payments, you need to provide bank details.
So, the provider might ask for a cancelled cheque to verify the account details from which you will make payments.
How to write a cancelled cheque?
Now that you know the reason behind cancelling a cheque, let us look at the right way to cancel a cheque.
Take a fresh cheque leaf from the chequebook. Draw two parallel lines across the layout of the cheque. In the space between the two lines, write “CANCELLED” in capital letters.
Make sure you do not draw or write over details like account numbers, branch addresses, or IFSC codes. There’s no need to sign the cheque or write anything extra on it.
To summarise, a cheque with two parallel lines on its body with ‘cancelled’ written between the lines is a cancelled cheque. The purpose of such a cheque is to verify if you have an account with that particular bank.
It also verifies the bank name, branch address, account number, IFSC code, and MICR code.
You will have to provide a cancelled cheque if you want to invest in mutual funds and stocks or buy insurance policies. Other applications include opening a bank account, withdrawing money from EPF, or opting for EMI or ECS.
The most important use of a cancelled cheque is the secure sharing of bank details with third parties.