What is it?
Canceled cheques do not have any monetary value. They are used to verify bank accounts as part of the customer know-your-customer process (KYC).
There have been reports of misuse of canceled cheques as recently as February 2016. It is therefore recommended to inquire if a photocopy or a scanned copy of the check, or the first page of the passbook, is acceptable before handing over a canceled cheques. After all, it is only necessary for verification of bank details.
Cancelling the cheques prevents its misuse. Just draw two parallel lines across the check and write “cancelled” between them. No signature is required.
This is an authentic source of information about users, such as their account numbers, names of account holders, MICR and IFSC codes, and bank branch locations.
Where is it used?
It is often used by salaried individuals to withdraw funds from their provident fund. In order to withdraw funds from an Employee Provident Fund account, an employer or Employee Provident Fund Organization requires a canceled cheques to accompany the withdrawal form. As a result, they will be able to validate the account details.
In order to comply with KYC requirements, a canceled cheques is also required when investing in market-linked instruments, such as mutual funds.
Most fund houses allow first-time investors to invest online, but they require physical documents for KYC. Aadhaar-enabled eKYC is now okay with scanned copies as well. If you want to invest more than Rs50,000 a year, you must complete a complete KYC process—verified by physical documents—even when using eKYC.
To make payments for loans from your savings bank account through a systematic investment plan (SIP), or to invest in mutual funds through a systematic investment plan (SIP), you must use the electronic clearance service (ECS).
In order to enable this service, you must provide a canceled cheques, as well as the amount to be deducted each month.
The brokerage requires a canceled cheques along with other KYC documents when opening a demat account, which you need to buy and sell stocks.
In addition to making insurance claims, canceled cheques are commonly used for term-life insurance, group health insurance, and motor insurance claims.
The fact remains that we have to understand how to use a check, to be specific a canceled cheques, even though we use various electronic payment methods.