Demand Draft also known as DD is a type of pre-paid negotiable instrument in which a drawee bank usually becomes a guarantor in order to make full payment when this instrument is presented. A unique feature of Demand Draft is that it cannot be dishonored as the payment is made beforehand. Demand Drafts are basically used to make payments to anyone outside a city.
Demand draft can be cleared at any branch of the same bank. Demand drafts are prepared by a bank official and it is even signed by them so the chances of default are not there at all. In fact it is not even mandatory to have a bank account in any particular branch from where a person is getting a Demand Draft issued. In order to receive the payment the beneficiary has to either deposit the Demand Draft in his or her bank account or get it collected from the branch which has issued the Demand draft.
In order to issue a Demand Draft, the bank usually deducts some amount from the bank account of a person who had requested for preparing the demand draft. So when the demand draft is presented for clearing it is the duty of the banker to make the payment. The demand draft can be prepared by paying cash to the bank as well but if the demand draft value exceeds Rs. 50,000/-, then the payment should be in cheque only.
The applicant has to provide his PAN mandatorily in situations where the value of the demand draft is more than Rs. 50,000/-. Demand drafts are usually prepared in Indian currencies but in case someone is required to make a payment in foreign currency then the draft can be prepared for the same. In fact demand drafts are an easy way of giving payments abroad without any risk of non-clearance of a DD.
Pay order is a financial instrument which is issued by the bank on customer’s behalf giving an order to pay a particular amount to a particular person in a same city. Payment orders are not negotiable and even this thing is printed in words on the instrument. In pay order as well there is no chance of dishonoring as the amount is already paid hence pay order is also a pre-paid instrument.
The validity of pay order is for 3 months from the day it has been issued. Pay orders are also known as banker’s cheque.
A pay order is always payable by the bank which issues it and they are applicable for payment in the same city. A pay order once made cannot be canceled if the other party is in a different city. These orders are usually acknowledged by the bank which gives a guarantee that the payment will be made.
Differences between Demand Draft and Pay Order
Both these instruments, i.e. demand draft and pay order are basically required or used for the same purpose but still are different to each other. The main differences between them are listed below:
1. Pay order also called Banker’s Cheque is a type of payment which gets cleared in the same branch of the bank which issued it where demand drafts are a mode of payment which gets cleared in any branch of the issuing bank.
2. In pay order, it is pre-printed that this instrument is non-negotiable whereas demand draft is a type of negotiable instrument. Basically a negotiable instrument is a type of document which guarantees the payment of a particular amount of money paid to one person from the other. It is a transferrable and signed document which promises to pay the amount on demand at any particular time.
3. Pay order can be cleared in any branch of the bank in the same city whereas demand drafts at cleared at any branch of the same bank. Demand drafts can be used to make payment to a different state as well and in case a person has to make payment within the city then they should go for the pay order.
Both these financial instruments are basically a secure mode of payment to any third party. These mechanisms of payment usually require visiting the branch of the bank. Still these instruments are required as many colleges and schools prefer these instruments compared to cheques as there is no possibility of dishonoring these instruments.
What is Cheque????
In simple terms, a cheque is a replacement for hard cash in paper form, which can be exchanged between two parties, just as cash would have been exchanged, to settle the obligation of one party to another. It is also referred to as an electronic mode of transaction and can be easily deposited in a bank to withdraw funds in its place. A cheque needs to be filled with certain details about the payer and the payee, which should be accurate and complete in all respects, for the cheque to remain valid. A cheque is normally valid for a period of three months, before it lapses and is rendered useless. The presenting party should ensure that the cheque received by them is presented before the bank within the due period.
Components of a Cheque
Ideally, one would find the following details on any bank’s cheque:
1. Date: It is the date on which the cheque is issued. Remember that a cheque is valid only up to a period of three months from this date.
2. Pay: The name of the person or the entity, to whom a payment is being made.
3. Or bearer: If the cheque is not to be paid to a specific person but simply to anyone holding the cheque, these words can be left non-stricken at the end.
4. Rupees: The amount of money that is being paid to the party.
5. Amount in numbers: The amount which is being paid, should be written in numbers.
6. Account number: This is pre printed on the cheque beforehand.
7. Authorised Signatory: This is the place where the issuer of cheque makes his signature to authorise the cheque.
8. Cheque number and MICR code: These are printed on the lower side of the cheque.
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