Can you withdraw any amount from bank using bearer's cheque? Know risks involved, income tax laws you may face (2024)

There are various ways to make non-cash payments to sellers of assets or services. A non-cash payment can be made by issuing a cheque or through net banking, UPI, debit card, credit card and so on. If the payment is made via a cheque, the instrument should either be an account payee cheque or a bearer's cheque.

An account payee cheque is one where the receiver is required to deposit it in his bank account to receive payment. The payment will be credited in the receiver's bank account usually in two to three days however in case of an outstation cheque this timeline can go up to 14 days. On the other hand, if a bearer's cheque is issued, the receiver can visit the bank on which the cheque was drawn and get the money in hand. Alternatively, a bearer's cheque can be deposited in a bank account to receive the money into the account.

Though the bearer's cheque is not commonly used, however, if you get one how should you handle it in the best possible manner. Can you use that cheque to withdraw any amount or are there any limits? What are the documents required to withdraw cash using a bearer's cheque? What are the risks involved in using a bearer's cheque to receive payment? Will there be any consequences under income tax laws for withdrawing cash from a bank using a bearer's cheque?

How to encash a bearer's cheque
Pallav Pradyumn Narang, Partner at tax advisory firm CNK & Associates LLP, says, "A bearer cheque can be encashed at any of the bank's branches. The bearer of the cheque will not be denied the amount mentioned on the cheque. The branch which receives the bearer cheque forwards a scanned copy to the parent branch of the bank. Once the main branch confirms the same, the bearer of the cheque gets the payment."

Manmeet Kaur, Principal Associate at law firm Karanjawala & Co. says, "The bearer of the cheque can present the cheque to any branch of the payee's bank under the Negotiable Instruments Act, 1881. However, the policy of a bank with respect to KYC documents pertaining to identity verification for encashing a bearer's cheque, especially for an amount above Rs 50,000, may differ from bank to bank. There are no service charges for issuance and clearing of a bearer's cheque."

Maximum amount that can be withdrawn

As the bearer's cheque can be easily encashed by the holder of the instrument, does it have an encashment limit? Ankit Jain, Partner, Ved Jain and Associates, a tax advisory and business consulting firm, says, "In general, there is no limitation of withdrawal of money through a bearer cheque. However, to avoid fraud and misuse, each bank has put in systems and procedures to ensure safety of the funds of its customers. Some of these can be based on the daily withdrawal limit, verification calls, cheque number verification, etc."

Many banks have practice of asking customers to give advance notice in case of high value bearer's cheque so that they can arrange adequate cash on the day of withdrawal.

Process of encashing bearer's cheque
To encash a bearer's cheque, one may need to undergo a know-your-customer (KYC) process. The KYC process is mandatory if the cheque being encashed is of high monetary value. According to Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2002, banks are required to conduct identity verification for all transactions equal to or above Rs 50,000. Thus, a bank may ask you to undergo a KYC process to encash a bearer's cheque.

Narang says, "The Reserve Bank of India (RBI) has laid down certain rules for the encashment of bearer's cheque. If the amount is of Rs 50,000 or more, the bank has to authenticate the identity of the person mentioned on the bearer's cheque. The KYC process will be initiated on the person encashing the cheque. A person will be required to provide documents for proof of identity, address proof along with a photograph. However, KYC is not mandatory if the amount is less than Rs 50,000."

Income tax laws one should be mindful of
Though there is no limit to the amount that can be encashed using a bearer's cheque, one can irk the income tax department. Kaur from Karanjawala & Co says, "Section 269ST of the Income-tax Act, 1961, states that no cash transaction can take place between two parties in a single day if the amount exceeds Rs 2 lakh. Thus, if an individual encashes a bearer's cheque exceeding Rs 2 lakh, then she will be liable to pay penalty under Section 217DA of the Income-tax Act. The penalty will be equivalent to the amount transacted in cash and payable by the receiver of the cash."

Here is an example to understand how much penalty will be levied. Suppose you have issued a bearer's cheque of Rs 3 lakh to a contractor. As the amount of transaction in a single day exceeds Rs 2 lakh, the contractor will be liable to pay a penalty of Rs 3 lakh. This penalty will be liable as cash transaction in a single day has exceeded the specified amount.

However, there is no consensus among experts if the cash payment made to close relatives such as to mother or husband comes under the purview of Section 269ST. Both Jain and Narang concur that Section 269ST will be applicable on all cash transactions above Rs 2 lakh irrespective of to whom the payment is made.

However, Kaur says, "Section 269ST shall not apply to transactions mentioned under Section 269SS, in this regard, reference may be placed on judgement passed by Income Tax Appellate Tribunal, Kolkata. The tribunal has held that transactions between husband and wife and between father and son, being close relatives, of one family etc. does not fall under the ambit of Section 269ST and 269SS, based on the facts and circ*mstances. The money given by the individual to support the family members; this is simply a money transfer from one family member to another for expenses. This is neither a loan nor a deposit in a stricter sense."

Narang says, "As per Section 269SS, any deposit or loan or any other specific amount should not be accepted from any person in cash if the amount exceeds Rs 20,000."

Large cash transactions made by individuals are reported by banks to the income tax department. Jain says, "Banks are required to report annual cash withdrawals in excess of Rs 10 lakh (from savings account) and Rs 50 lakh (from current accounts) to the income tax authorities along with the PAN of the holder. The tax department will use data analytics to determine whether the said transaction needs further investigation or not."

Will TDS be applicable on cash withdrawal via bearer cheque?
Under the income tax laws, TDS under Section 194N is applicable if the cash withdrawal from a bank account exceeds the specified threshold in a financial year.

Both Kaur and Narang have a view that TDS will not be applicable on the cash withdrawal via a bearer cheque. Kaur says, "The language of Section 194N reflects that TDS for cash transactions will be applicable if the recipient and bank account holder are the same. However, in case of bearer cheque, the recipient and account holder can be two different entities. Hence, TDS under Section 194N will not be applicable on cash withdrawal through bearer's cheque."

The bank is required to deduct TDS under Section 194N when withdrawals exceed the specified level from a bank account. "However, in a bearer cheque case, the recipient may not even have a bank account with the bank. Thus, application of this cheque may not arise," says Narang.

However, Jain disagrees. He says, "TDS provisions under Section 194N are applicable to the person making the withdrawal and not related to the mode of withdrawal, such as through a bearer cheque or otherwise. In general, if a person withdraws cash exceeding the specified threshold in a financial year, the bank, co-operative bank, or post office is required to deduct TDS on the amount exceeding the threshold. So, if you encash a bearer cheque and the cash withdrawal exceeds the specified threshold under Section 194N, the TDS provisions would be applicable, and the bank would deduct TDS on the amount exceeding the threshold."

Risks with bearer cheque
A bearer cheque does not require any endorsem*nt. An individual having possession of this type of cheque can easily obtain funds from the bank by undergoing the KYC process. Narang says, "These types of cheques do not require account holder's authorisation for making the payment. However, if a bearer's cheque is lost, stolen or falls into the wrong hands, then it can impact the issuer of the cheque, who stands to lose the amount stated in the cheque."
The RBI has introduced a positive pay system for cheques having value above Rs 50,000 however it is voluntary for banks to implement it up to cheque value of Rs 5 lakh. The system is mandatory for cheque values above Rs 5 lakh. Jain says, "This system helps detect any discrepancies and prevent fraudulent encashment of cheques either issued as bearer cheque or account payee cheque."

According to the guidelines issued by the RBI on July 6, 2017, customers have no liability with the bank if they inform the institution of a fraudulent transaction in their account within three days. Kaur says, "The guidelines on fraudulent transactions cover transactions done due to deficiency on the part of the bank or there is a third-party breach and the deficiency lies (neither with the bank nor with the customer) such as debit card, credit card, cheques, etc."