Demand draft(DD) is a printed statement that bears a monetary value that will be paid to the Payee. The Payee can be any individual, an organization, or a trust. Demand Draft is recognized by its unique serial number at its bottom.
A Demand Draft is a prepaid-negotiable instrument that is used as a Bill of Exchange when the two parties in the transaction are not familiar with each other. In the process of obtaining a DD, one has to pay the sum which the DD bears, money is debited from the Payer’s account only after reaching the end-user. DDs cannot be redirected or struck once paid!
The Bank issues the DD to the payer by drawing money from the payer, unlike a cheque where the payer issues the cheque. The bank has to approve the DD whereas cheques have to be signed by the payer. The Issuance charges for a Demand Draft depend on the amount it bears.
The payer can either pay the amount either through cash, cheque or the bank can debit immediately from the payer’s bank account. In the case of cash or cheque, a draft can only be made up to INR 50,000 Only. There happens an immediate debit while preparing a DD in the Payer’s Bank account.
The Bank is the drawer who draws the money from the payer’s bank account and keeps with it till the Demand Draft is submitted by the Payee to the bank. He/She has to present the DD in the same bank irrespective of the branch and show proof. The payee need not have a bank account in the same bank or any other bank.
DD’s are issued with a fixed date of expiration. If the Payees does not submit the Demand Draft, It gets expired in 3 months. Either the payer can revalidate the Demand Draft to extend the validity or the bank credits back the debited amount to the payer’s account. The revalidation of the DD can be done only once. Suppose if the payer wants to cancel a demand draft, he/she has to pay certain charges along with a letter of cancellation to the bank.
Two Types of Demand Draft:
- Sight demand draft: The Payee can get the money from the bank after the verification. Sight Demand Draft is drafted for immediate transactions.
- Time demand draft: The Payee can only receive his money only after a determined future date as the order of the Payer. Time Demand Draft is more suitable for trading or transporting risky goods on credit.
Demand Drafts can be filed online and can be collected from the nearest branch or post office.
Suppose Jelena wants to pay the KMK organization for her daughter to get into the school. As KMK is a big organization to avoid frauds or bouncing of cheques, it prefers only DD. So the Payer-Jelena goes to the bank asks the bank to draw the amount from Jelena’s bank account. Now the banker is the drawer, who draws money from the payer and prepares a draft in the name Jelena. After presenting the DD to the Payee- the one who is receiving the money. KMK firm can present it at its own convenience within 3 months.
Cheque vs Demand Draft
- A cheque can be dishonoured by an individual, At the time when the beneficiary presents the cheque it can get bounced due to insufficient balance, whereas demand draft can never be bounced due to an insufficient balance.
- There are parties involved in the lifetime of a cheque are Drawee who issues and approves the cheque signing it, the payee to whom the cheque is addressed and the intermediary who is called as drawer is the bank.
- The Cheque is issued by the payer, whereas the bank issues the demand draft at the interest of the payee.
- Cheque is signed and approved by the an individual who is the customer of the bank, whereas demand Draft is approved by the bank authorities.
- There are no charges for an issuance of a cheque, but for a demand draft, the payer is entitled to issuance charge.
- The payment process is only when the cheque is presented by the payee, whereas the payment process in demand draft is issued only after paying money.
- So, cheques can be reverted before the beneficiary presents it in the bank, but in demand draft cannot revert the payment, Only when a letter of cancellation is presented, the payer would recieve is money back.