Cancelled Cheque: Meaning, Uses, and How to Write One

A cancelled cheque is a regular cheque that has the word "CANCELLED" written across it, making it unusable for payments. Despite that, it plays an important role in banking and financial processes. It helps verify your bank account details such as account number, IFSC code, and bank name. Cancelled cheques are commonly required for KYC verification, applying for loans, EPF withdrawals, insurance, and other financial services. Understanding the cancelled cheque meaning and the use of cancelled cheque is essential for smooth documentation. In this blog, you will learn about a cancelled cheque, including its meaning, purpose, how to prepare cancelled cheque, and more.

What Is a Cancelled Cheque?

A cancelled cheque is a cheque leaf that is made invalid for financial transactions. It becomes cancelled when two diagonal lines are drawn across it and the word 'CANCELLED' is written in the center.This makes the cheque unusable for withdrawing money or making payments. However, it still displays key banking information such as the account number, IFSC code, bank name, and account holder’s name. These details make the cheque a valid document for verifying bank details in financial or official processes.

When Is a Cancelled Cheque Required?

Here is a key Scenarios of cancelled cheque requirements:

1. Employee Provident Fund (EPF) and Pension Withdrawals

To withdraw funds from the EPF account or transfer pension amounts, the EPFO asks for a cancelled cheque. The cheque must clearly show the account number and IFSC code. This helps the EPFO confirm the correct bank account for crediting the claimed amount. It reduces errors during fund disbursement and ensures that the money reaches the right beneficiary.

2. ECS, Direct Debit, or Standing Instructions

Banks and service providers collect a cancelled cheque when setting up Electronic Clearing Service (ECS) or auto-debit instructions. This is common for recurring payments such as insurance premiums, mutual fund SIPs, and utility bills. The cheque confirms that the account is valid and supports electronic debit mandates, ensuring smooth and timely payment processing.

3. Loan EMI or Overdraft Setups

During the approval or disbursal of loans, financial institutions request a cancelled cheque to validate the borrower’s account. It helps set up EMI auto-debit instructions directly from the borrower's account. This process ensures that monthly installments or overdraft repayments are collected on time without manual intervention.

4. KYC and Financial Account Linking

When opening demat accounts, investing in mutual funds, or starting fixed deposits and recurring deposits, a cancelled cheque is used to link the bank account. It is also a part of KYC documentation. SEBI rules require verification of bank ownership either through a small amount transfer (penny drop) or a cheque scan. This ensures that the financial account belongs to the correct investor or customer.

5. Salary and Reimbursements

Employers often collect a cancelled cheque from new employees during onboarding. This helps verify the employee's bank account before initiating salary credit or reimbursements. It avoids delays and ensures that payments reach the correct account through the company’s payroll system.

6. Government Subsidies and Benefit Schemes

Government schemes such as PM-Kisan, LPG subsidy under PAHAL, and rooftop solar incentives require a cancelled cheque. It ensures that the applicant’s bank account is correctly linked with the scheme for Direct Benefit Transfer (DBT). This method helps transfer benefits without delays or misrouting, especially in rural and semi-urban areas.

Why Is a Cancelled Cheque Required?

Here is a key reason for cancelled cheque requirements:

1. Verifies Bank Account Details

A cancelled cheque shows the account number, IFSC code, and the name of the account holder. Financial institutions use this document to match the applicant’s details with official bank records. It helps avoid mistakes in fund transfers and ensures accuracy in account identification.

2. Confirms Account Ownership

Financial institutions use a cancelled cheque to confirm that the applicant owns the mentioned bank account. This step protects both the institution and the customer from identity fraud. It also builds trust during financial transactions and document verification.

3. Facilitates KYC Compliance

Cancelled cheques are used in Know Your Customer (KYC) procedures. When opening a new financial account like a mutual fund, fixed deposit, or recurring deposit, the bank uses the cheque to verify the correct linkage of the account with the investor's identity.

4. Enables Accurate Auto-Debits

For recurring payments such as SIPs, EMIs, or utility bills, banks need exact bank details. A cancelled cheque allows the bank to activate auto-debit facilities through ECS or NACH. This ensures that payments go from the right account without failure or delay.

5. Required for Salary and Reimbursement Setup

Companies collect a cancelled cheque from employees before crediting salaries or processing reimbursements. This confirms that the salary is transferred to the correct bank account without delays or errors in monthly payouts.

6. Used in Loan Processing

When a person applies for a loan, banks ask for a cancelled cheque to verify the repayment account. This ensures that EMIs are deducted correctly from the verified account without technical errors or mismatches during loan tenure.

7. Accepted in Demat and Trading Accounts

Stockbrokers and depository participants ask for a cancelled cheque when opening a demat or trading account. This step helps link the correct bank account for fund transfers related to stock purchases, sales, or dividends.

8. Needed for Government Subsidy Transfers

Government schemes like PM-Kisan, LPG subsidy, and solar rooftop credits require a cancelled cheque. It ensures that the benefit amount reaches the correct account of the registered applicant under Direct Benefit Transfer (DBT) systems.

9. Supports Financial Institution Audits

During internal audits, banks use cancelled cheques to cross-check customer account details. This helps detect mismatches, maintain proper records, and reduce the risk of compliance violations during financial reviews.

10. Complies with SEBI Verification Norms

The Securities and Exchange Board of India (SEBI) uses cancelled cheques to verify the investor’s bank account. This applies during mutual fund investments or stock market registrations. It ensures that all payouts or redemptions reach the correct account.

How to Write a Cancelled Cheque?

Here is a step-by-step process to write a cancelled cheque:

Step 1: Select a fresh cheque leaf

Pick one unused cheque from the chequebook issued for the specific bank account. Make sure the cheque has pre-printed details such as the account number, bank name, IFSC code, and MICR code. Avoid torn or overwritten cheques. The cheque must display clean, readable information.

Step 2: Draw two parallel lines diagonally across the cheque

Take a blue or black pen and draw two straight lines from the top left to the bottom right corner. The lines must not touch or blur important details like the IFSC code or account number. These lines show that the cheque is not fit for any payment.

Step 3: Write the word “CANCELLED” in capital letters

Write the word “CANCELLED” in bold capital letters between the two diagonal lines. Keep the word centered and legible. This clearly marks the cheque as unusable for withdrawal or deposit. Use only uppercase letters and avoid abbreviations. It will work if you write it largely on the leaf in upper case lower case format like “Cancelled”. They both play the same function.

Step 4: Leave all other fields blank

Do not write anything in the cheque fields such as date, payee name, amount, or signature. A valid cancelled cheque must remain blank except for the cancellation mark. Writing anything else can confuse or invalidate the cheque for verification.

Step 5: Do not sign the cheque

Avoid signing the cheque. A cancelled cheque does not need a signature because it is not a financial instrument. A signature may cause confusion or allow misuse in case the cheque falls into the wrong hands.

Step 6: Use waterproof and dark ink

Choose a pen with waterproof black or blue ink. This helps maintain clarity even if the cheque is scanned or photocopied. Faded or smudged writing may lead to rejection during document processing.

Step 7: Check that all pre-printed details are visible

Before submitting the cancelled cheque, verify that the printed information such as account number, account holder’s name, IFSC code, and bank branch remains readable. If any part is unclear or covered, discard the cheque and repeat the process with a new one.

How to Prevent Risk Associated with a Cancelled Cheque?

Below is the ways to prevent risk associated with a cancelled cheque:

1. Record the Cheque Number

Before cancelling a cheque, write down its serial number. This helps identify the cheque if it goes missing. It also allows the account holder to report the exact number to the bank in case of any misuse.

2. Share Only with Verified Institutions

Always give a cancelled cheque to trusted and authorized entities like banks, employers, or government departments. Never hand it over to strangers or upload it on unverified websites or apps. This avoids misuse of account details.

3. Send Scanned Copy When Allowed

If digital submission is accepted, prefer a scanned copy of the cancelled cheque instead of the original. This keeps the original document safe and reduces the chances of it falling into the wrong hands.

4. Store the Original Safely

Keep the original cancelled cheque in a secure place such as a locked drawer or cabinet. Do not leave it in an open or accessible area. This limits physical access and protects the document from theft.

5. Use Dark, Permanent Ink

Use a waterproof pen with black or blue ink to cancel the cheque. Write clearly and avoid faint or smudged ink. Permanent ink ensures that the cancellation remains visible in photocopies or scanned images.

6. Maintain a Personal Record

Maintain a private log or note with the date and the purpose of issuing the cancelled cheque. Do not write anything on the cheque. This helps track why the cheque was issued and to whom it was given.

7. Inform the Bank if Lost

If a cancelled cheque is lost or stolen, immediately inform the bank. Provide the cheque number and account details. The bank can block that specific leaf and keep watch for any suspicious activity.

8. Monitor Bank Account Activity

After issuing a cancelled cheque, check the bank statement and transaction alerts regularly. If there is any unauthorised debit or activity, report it to the bank without delay. Early action helps prevent fraud.

9. Destroy Unused Copies Securely

Once the cancelled cheque has served its purpose, shred any extra photocopies or delete digital files from devices. This prevents misuse of the bank details in the future.

10. Keep a Copy for Reference

Keep a scanned copy of the cancelled cheque with visible bank details and cancellation mark. This copy can serve as proof of submission in case the original is misplaced or someone requests verification.

Conclusion

A cancelled cheque is an essential document that helps confirm important bank details like account number, IFSC code, account holder’s name, etc. It plays a vital role in various financial and verification processes such as KYC, salary setup, government benefit transfers, and more. While it offers convenience, it also carries sensitive data. Properly preparing and securely handling a cancelled cheque helps maintain data accuracy, prevents misuse, and ensures smooth execution of banking and documentation processes.