What is it?
As the name suggests, a cancelled cheque has no monetary value. It is a common know-your-customer (KYC) document and is used for verifying the bank account.
Even though a cancelled cheque does not have any financial value, there have been reports of its misuse as recently as February 2016. Therefore, before handing over a cancelled cheque you should enquire if a photocopy or scanned copy of the cheque, or the first page of the passbook is acceptable. After all, it is only required for verification of the bank particulars.
The cheque is cancelled so that it is not misused. To cancel it, simply draw two parallel lines across the cheque and write ‘cancelled’ between them. It does not need to be signed.
It is an authentic source of basic user information such as: account number, account holder’s name, MICR and IFSC codes and name and address of the bank branch.
Where is it used?
Salaried individuals use it often to take out money from their provident fund (PF). To withdraw funds from a PF account, a cancelled cheque needs to be attached to the withdrawal form before it is submitted to the employer or to the Employees’ Provident Fund Organisation. This will help them validate the details of the account to which the amount is to be credited.
A cancelled cheque is also needed when you start investing in market-linked instruments like mutual funds, as part of the KYC formalities.
You can invest online, but first-time investors need to complete the KYC formalities with physical documents with most fund houses. Some are now okay with scanned copies too. Even those who use Aadhaar-enabled eKYC, need to do the complete KYC process—verified by physical documents—to be able to invest more than Rs50,000 in a year.
If you invest in mutual funds through a systematic investment plan (SIP), or want to pay the equated monthly instalments for a loan from your savings bank account; you will need to use the electronic clearance service (ECS).
This service allows money to be auto-debited from your account every month to service the SIP or loan, for example. Enabling this service also requires a cancelled cheque.
Similarly, while opening a demat account, which you need for buying or selling stocks, a cancelled cheque needs to be submitted to the brokerage along with the account opening form and other KYC documents.
Another common use of the cancelled cheques is while making an insurance claim, especially in term-life insurance, group health policies and motor insurance.
As pointed out earlier, we may go about our lives using all kinds of e-payment methods but we still need to know how to use a cheque, a cancelled to be precise.