Cheque under Section 6 NI Act: Essentials and the Truncation System

A cheque belongs to two subjects at once. To the law of negotiable instruments it is a species of bill of exchange, with rules about negotiation, holders and endorsement. To banking law it is something narrower and more practical: the written mandate by which a customer orders his banker to pay. This note takes the second view. It deals with what makes a cheque a cheque, what the banker must look for on its face, and how the paper instrument has survived into an electronic clearing system.

1. The Definition

• A species of bill: every cheque is a bill of exchange, so every rule about bills applies unless the Act provides otherwise. Two features distinguish it: the drawee must be a specified banker, and it must be payable on demand.
• Why the drawee must be a banker: the whole scheme of crossing, the protections for the paying and collecting banker, and the offence under Section 138 all depend on there being a banker in the middle.
• Payable on demand: a cheque carries no days of grace and needs no acceptance. A post dated instrument remains a cheque, but is not payable until the date arrives.
• The electronic additions: the definition was widened by the Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 to include the electronic image of a truncated cheque and a cheque in the electronic form, which is what allows an image rather than the paper to be the operative instrument in clearing. The explanation defining a cheque in electronic form was recast by the Negotiable Instruments (Amendment) Act, 2015.

The statutory explanations

• A cheque in the electronic form means a cheque drawn in electronic form by using any computer resource and signed in a secure system with a digital signature, with or without a biometric signature and an asymmetric crypto system, or with an electronic signature.
• A truncated cheque means a cheque which is truncated during the course of a clearing cycle, either by the clearing house or by the bank, whether paying or receiving, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing.
• Clearing house means a clearing house managed by the Reserve Bank or recognised as such by it. The expressions borrowed from the Information Technology Act, 2000 carry their meaning from that statute.

2. The Essentials of a Valid Cheque

Figure 1: What the banker looks for on the face of the instrument

• The payee must be certain: the payee must be a certain person, named or indicated with reasonable certainty, or the cheque may be made payable to bearer.
• The sum must be certain: where the amount in words and in figures differ, Section 18 provides that the amount stated in words is the amount payable. In practice banks return such a cheque rather than pay on the words alone.
• Date: a cheque must bear a date. An undated cheque is incomplete; an ante dated cheque is valid; a post dated cheque is not payable before its date; and a cheque is stale after the period of its validity.
• Validity: by direction of the Reserve Bank, a cheque, draft, pay order or banker's cheque is valid for three months from the date it bears, reduced from six months with effect from 1 April 2012.
• Signature: the drawer's signature must correspond with the specimen held by the bank. A cheque signed otherwise than in accordance with the mandate is not the customer's order at all.
• Material alteration: an alteration in the date, the sum, the payee or the crossing is material and avoids the instrument unless authenticated by the drawer's full signature. Since 1 December 2010 the Reserve Bank has not permitted any alteration other than to the date on a cheque cleared through the image based system, so a cheque altered in any other respect must be replaced.

3. Kinds of Cheque

Figure 2: The cheque distinguished from an ordinary bill of exchange

• Bearer and order: a bearer cheque is payable to whoever presents it and passes by mere delivery; an order cheque is payable to the named payee or his order and passes by endorsement and delivery. The distinction governs the protection the paying banker enjoys.
• Open and crossed: an open cheque may be paid across the counter in cash; a crossed cheque may be paid only through a banker, which is the subject of Sections 123 to 131.
• Ante dated, post dated and stale: the three defects of date described above.
• Mutilated: a cheque torn or damaged so that a material part is affected is returned unless the mutilation is confirmed by the drawer.
• Banker's cheque, pay order and demand draft: instruments drawn by a bank on itself or on another branch. They are not ordinarily treated as cheques within Section 6, since the drawer and drawee are the same institution, but Section 85A and Section 131A extend the relevant protections to drafts.
• Gift cheque, traveller's cheque and marked cheque: commercial variants; a marked or certified cheque, confirmed by the drawee bank before presentment, is not provided for by the Act and rests on banking practice.

4. Cheque Truncation

• What truncation means: the physical movement of the cheque stops at the collecting branch, and an electronic image together with the data in the code line travels through the clearing system instead.
• Legal foundation: the amended Section 6 makes the image of a truncated cheque a cheque, and the amendments to Sections 64, 81, 89 and 131 adapt presentment, proof of payment, material alteration and the collecting banker's protection to it. Under Section 64, a drawee bank that doubts an image may call for further information or, where it suspects fraud or tampering, for the paper itself.
• The standard: cheques must conform to the CTS-2010 standard, which prescribes paper quality, the position of fields, void pantograph security printing, the bank logo in ultraviolet ink, and a standard code line. Non-conforming cheques are not accepted in clearing.
• Obligation of the collecting bank: Explanation II to Section 131 places a duty on the banker who receives payment on the basis of an electronic image of a truncated cheque to verify the prima facie genuineness of the cheque and to detect any fraud, forgery or tampering apparent on the face of the instrument that can be found with due diligence and ordinary care.
• Keeping the paper: the bank that truncates the cheque retains the physical instrument and must produce it if the drawee bank or a court requires it.
• Effect: clearing time fell from days to a single cycle, and from 4 October 2025 the Reserve Bank began moving the system to continuous clearing with settlement on realisation, so that a cheque presented during the day is cleared within hours.

5. The Positive Pay System

• The problem: truncation removed the paper from the drawee bank's hands, so the bank now pays on an image. A well forged or altered cheque is harder to detect on a screen than in the hand.
• The answer: from 1 January 2021, the positive pay system requires the drawer to send the key details of a cheque he has issued to his own bank, electronically, through internet banking, a mobile application, a short message or an automated teller machine.
• The details: at a minimum the date, the name of the beneficiary or payee and the amount. The clearing system cross checks these against the instrument presented and flags any discrepancy to the drawee and presenting banks.
• The thresholds: every bank must enable the facility for account holders issuing cheques of ₹50,000 and above, and availing it is optional for the customer. A bank may make it compulsory for cheques of ₹5,00,000 and above.
• Dispute resolution: only cheques registered under the system are eligible for the dispute resolution mechanism of the clearing houses, which gives the customer a practical reason to use it.

6. Questions Arising

Is a post dated cheque a cheque?

Yes. It satisfies Section 6 because it is drawn on a specified banker and is not expressed to be payable otherwise than on demand; it is simply not payable until the date arrives. A bank that pays a post dated cheque before its date acts outside the mandate and cannot debit the customer. For the purposes of Section 138 the cheque is treated as drawn on the date it bears.

What happens when the amount in words differs from the amount in figures?

Section 18 provides that where the amount is stated differently in figures and in words, the amount stated in words is the amount undertaken or ordered to be paid. In practice a bank returns such a cheque with the answer that the amounts differ, because paying on the words alone exposes it to a dispute with the drawer, and the difference is a recognised ground of return in clearing.

7. Quick Revision

8. Frequently Asked Questions

What is the definition of a cheque?

Section 6 of the Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand, and it includes the electronic image of a truncated cheque and a cheque in the electronic form.

How long is a cheque valid?

Three months from the date it bears. The Reserve Bank reduced the period from six months to three with effect from 1 April 2012, and the same period applies to a demand draft, a pay order and a banker's cheque. A cheque presented after that is stale and is returned.

What is a truncated cheque?

A cheque truncated during the course of a clearing cycle, either by the clearing house or by a bank, immediately on generation of an electronic image for transmission, which substitutes the further physical movement of the paper. The image is a cheque for the purposes of the Act, and the paper stays with the collecting bank.

What is the positive pay system?

A fraud control measure in force since 1 January 2021 under which the drawer sends the key details of a cheque he has issued, at least the date, the payee's name and the amount, to his own bank electronically. The clearing system cross checks them against the instrument presented and flags any discrepancy. Banks must offer it for cheques of ₹50,000 and above and may make it compulsory at ₹5,00,000 and above.

Can a bank pay a cheque that has been altered?

Only where the alteration is authenticated by the drawer's full signature, and even then, in image based clearing, only a change of date is permitted, so a cheque altered in any other respect must be replaced. A material alteration that is not authenticated avoids the instrument. Where the alteration is not apparent, Section 89 protects a banker who pays according to the apparent tenor and otherwise in due course.

9. Related Topics and Provisions

• Crossing of cheques and its effect on the banker
• The paying banker and payment in due course
• The collecting banker and the protection of Section 131
• Dishonour of cheques under Section 138
• Payment systems and the digital rupee