Demand Draft: Types, Benefits & How to Make a DD?

A demand draft (DD) is a widely used financial instrument that facilitates secure and convenient fund transfers. Let us explore the meaning of DD in banking, understand the intricacies involved and learn how to make a DD.

A demand draft is a form of negotiable instrument issued by banks on behalf of an account holder. It acts as a promise of payment, providing a secure way to transfer funds. The term DD in a bank refers to this financial document that guarantees the payee.

• A demand draft is a prepaid instrument, implying it is already paid for by the payer and can be transferred to a third party, ensuring flexibility in financial transactions.
• Banks issue demand drafts on behalf of account holders, acting as a guarantee for the payee that the specified amount will be paid.
• The demand draft serves as a commitment from the issuing bank to pay the specified amount to the payee, making it a reliable mode of fund transfer.
• DDs offer a secure means of transferring funds, minimising the risk of fraud or unauthorised access during the transaction.

Here’s how demand drafts operate:

• Application and Documentation: To initiate the demand draft process, the account holder must fill out an application form, providing essential details such as the payee's name, amount, and necessary documentation.
• Payment and Issuance: Once the application is processed, the account holder makes the payment, either in cash or through a debit from their account. The bank then issues the demand draft with unique identification details.
• Transfer to Payee: The account holder can transfer the demand draft to the intended payee, ensuring a secure handover of the financial instrument.
• Encashment Process: The RBI has changed the rules with respect to encashing DDs. You can no longer encash a DD directly. Instead, you need to submit it to your bank. Upon successful processing, the amount will be transferred to your account. You can withdraw it subsequently. If the issuing bank is the same as the one where you hold an account, the clearance is substantially quicker. In such a case, you may withdraw the amount using a cheque or a self-withdrawal form in a matter of a few minutes.
• Validity Period: Demand drafts typically have a validity period of three months. It is crucial to encash or deposit the DD within this timeframe to avoid any complications.

Also read: What is a Post-Dated Cheque?

The crucial components that define the particulars of a demand draft include:

• Payee information (payee is the intended recipient of the specified amount)
• Amount to be paid
• Date of issue
• Unique DD number
• Issuing bank details
• Validity period
• Sign and stamp of the issuing bank’s authorised person

While the specific form and requisite details may vary across banks, here’s the information typically requested in a DD issuance form. It is important to have this information handy and fill in the details carefully to avoid any complications.

• Personal details of the payer – your name and address
• Details of the bank (branch and account) issuing the DD
• Personal details of the payee – the recipient’s name and address
• Amount for which the DD is to be made – both in figures and in words
• Name of the city where DD is payable
• Signature of the payer

Some banks may also want you to include the DD issuance fees charged by the bank and the total amount payable (DD amount + the fees charged). Bank officials will give you the fee amount and the total figure to include in the form.Also read: What is Beneficiary in Banking?

Understanding the distinction between the different types of demand drafts is crucial for both payees and payers, as it influences the dynamics of financial transactions and the timing of fund disbursement. Primarily, there are two types of DDs that you can opt for:

1. Sight Demand Drafts: A Sight Demand Draft requires the payer (drawer) to make payment immediately upon presentation of the demand draft. It is also known as a "sight payment" draft. Sight drafts facilitate quick and immediate transactions, making them suitable for scenarios where prompt payment is essential, like a transfer‌ of ownership of goods or payment of services rendered.
2. Time Demand Drafts: Unlike sight drafts, Time Demand Drafts involve a deferred payment arrangement. The payer commits to making the payment at a specified future date. Time drafts offer flexibility in payment timelines, making them suitable for transactions where an immediate settlement is not a prerequisite. Time drafts are often employed in international trade and commerce, allowing for extended credit periods and accommodating the complexities of cross-border transactions.

Since banks are the only institutions authorised to make a DD, you should know the process involved. Most banks offer an online and an offline mode for creating a DD.

• Now you know how to make a demand draft with cash. However, while doing so, remember that it cannot be done for a DD amount exceeding Rs. 50,000. In such a case, you must pay for it by writing a cheque.
• Moreover, for amounts exceeding Rs. 50,000, you must provide a copy of your PAN.
• For smaller amounts, just your ID and account proofs may suffice.
• It is advisable to make a physical or soft copy of your DD before giving it to the payee to avoid future disputes.
• A DD is valid for 3 months only. If not submitted to the payee bank within this period, it expires and may need to be revalidated, or a fresh DD would need to be created.

• Online Mode: Let us first take a look at how to get a DD from a bank via the online mode (NetBanking).Step 1: Login to your NetBanking account through the bank’s website or mobile appStep 2: In your account section, locate the option for raising ‘Request’Step 3: Find and select the option to "Issue a Demand Draft"Step 4: Choose the account for making the paymentStep 5: Provide the required DD DetailsStep 6: Select the branch from where you wish to receive the DDStep 7: Enter the DD payable locationStep 8: Submit the DD request and make the paymentNote: some banks may offer the option to courier the DD to your address (at a nominal charge). While the above-mentioned steps are usually how the process works, do check with your bank regarding the specific course of action to be followed.
• Offline Mode: People may opt for the offline mode if they are more comfortable with human assistance, do not have a NetBanking account, or wish to make a DD by paying for it in cash. Here’s what you need to do in such cases.Step 1: Visit your bank’s branch in personStep 2: Fill out the DD application form with careStep 3: Review the information entered and sign the formStep 4: Submit the DD form to the authorised bank officialStep 5: Make the total payment that includes the DD amount and associated chargesStep 6: Collect the acknowledgement receipt
• Things to Note:

Also read: Digital Banking Awareness for Parents

The creation and issuance of a DD is a service provided by banks. As such, they charge a fee for this service. Typically, this charge can fall between Rs. 1 and Rs. 5 per thousand rupees of the DD amount. Furthermore, there will be a service tax applicable on the final amount. If you decide to cancel a DD, you will need to incur cancellation charges ranging between Rs. 100 to Rs. 350.Remember, there is no specific amount fixed by the RBI. Hence, the actual charges may vary across banks. It is advisable to check your bank’s website or contact a bank representative to know the charges to be borne.

• Secure: Demand drafts offer a secure means of fund transfer, reducing the risk of unauthorised access and fraudulent activities during the transaction. Moreover, being prepaid, there is no risk of a DD bouncing like a cheque can.
• Trackable: Each demand draft is assigned a unique identification number, facilitating easy tracking and verification during encashment.
• Wide Acceptance: Demand drafts are widely accepted globally, making them suitable for international transactions, especially in trade and commerce.
• Deferred Payment Option: Time drafts, a type of demand draft, provide flexibility with deferred payment options, accommodating scenarios where immediate settlement is not required.
• Clear Documentation: Demand drafts come with clear and structured documentation, specifying crucial details such as payee information, amount, and validity period.

Also read: What is an Auto Sweep Facility? – A Brief Overview

• Limited Validity: Demand drafts have a specified validity period of six months. Failing to encash or deposit within this timeframe can lead to complications.
• Encashment Process Complexity: The encashment process may involve multiple steps, including presenting the draft to the drawee bank. This complexity can pose challenges, especially in certain geographic locations.
• Cost Implications: Most banks charge fees for issuing demand drafts, and additional charges may apply if the draft is not encashed within the stipulated validity period.
• Risk of Loss: As a physical instrument, demand drafts can be lost or misplaced, leading to potential complications in the encashment process.
• Availability and Accessibility: The availability of demand draft services may vary across banks and regions, impacting accessibility for individuals or businesses in certain areas.

Cheques and DDs are both instruments for making payments. But that’s where the similarity ends. Understanding the differences between cheques and demand drafts is crucial for individuals and businesses to choose the most appropriate instrument based on their specific financial needs and circumstances. Here are the key ones:

Demand drafts play a crucial role in securing fund transfers. Being a prepaid instrument, demand drafts offer a reliable and structured method for financial transactions while sending or receiving funds. Understanding how to make DD, take DD from a bank, and encash a demand draft ensures you can navigate this financial instrument with confidence.