What is Negotiable Instrument Act?

The Negotiable Instrument Act in India helps govern the usage and transfer of various negotiable instruments, including cheques, promissory notes, and bills of exchange. The act has been amended multiple times by banking and other public financial institutions, with 2018 being the latest. 

Negotiable instruments can be written documents that promise payment to the holder but can be easily transferred to another person. However, certain rules and regulations exist for doing so, and the Negotiable Instrument Act covers this legal ground. 

The act established the rules for issuing, transferring, and discharging the negotiable instruments while clarifying the rights and obligations of the parties involved in the transaction. The act also sheds light on areas like paying interest, identification of dishonoured instruments, and the legal process of resolving any dispute that may arise while using the instruments. 

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Keep reading to find the answers to what is Negotiable Instrument Act and what recent amendments have been made. 

What is the Negotiable Instrument Act?

The Negotiable Instrument Act was passed in 1881 during British colonial rule, and since then, it has been amended multiple times. The law was drafted by Arthur Phillips, which guaranteed the bearer a sum of money to be payable on demand or in the future. This was introduced to make the growth of banking and commercial transactions easy

The primary purpose of the NI act 1881 was to legalise the system of negotiable instruments. This was used to transfer funds from one entity to the other. The term “negotiable” refers to a note that can be assigned to another party. 

When the note gets transferred, no additional stipulations and demands on the bearer of the document are required.

Types of Negotiable Instruments 

There are primarily three types of negotiable instruments that are popularly used. Let’s explore these negotiable instruments examples to gain a deeper understanding!

Types of Negotiable Instruments


Promissory Notes

Promissory notes, IOUs, or loan agreements, are specific legal lending documents stating that the borrower promises to repay the loan to the lender within the stated time frame. 

This can be legally enforced, creating a legal obligation on the borrower to repay the loan. A promissory note is valid for three years from its execution. There is no maximum limit regarding the amount which can be lent or borrowed. 

Bills of Exchange

Bills of exchange are ordinary orders that legally demand one party to pay another. This written order is primarily used in international trade that binds one party to pay back a certain amount of money borrowed to another party on demand and within a predestined date.

The time limit for bills of exchange is thirty days and may accrue interest if the borrower does not pay back the lender. However, the interest rate is determined based on specific negotiable instruments examples. 


Cheques are drawn only on a particular banker, unlike the bill of exchange, which can be drawn on anyone, including a banker. Cheques are not expressed to be payable otherwise than on demand. 

A single cheque transfers money rather than withdrawing and carrying cash with oneself. Crossed cheques are traceable, thus making it difficult for fraudulent individuals to withdraw money when misplaced. 

According to the RBI, the validity of a cheque is three months from the date of issue. 

How Is The Negotiable Instrument Act Important For Business Transactions?

Here is why the NI act 1881 is important for business transactions. 

1. Provides a legal framework

The act helps in providing a legal framework for the negotiable instruments, making them legally binding to court and law. This assures the businesses that they can rely on these instruments and recover the debt in case of any mishap.  

2. Supports trade and commerce

The negotiable instruments are great for adding financial flexibility to the business, and the act ensures their reliability. Therefore, in a way, the act creates a secure ground where both parties (national or international) can freely trade. 

3. Provides recorded transactions

The negotiable instruments keep a clear and transparent record of transactions that helps businesses accurately maintain their financial records. 

4. Increases financial flexibility

With the help of negotiable instruments, businesses can easily raise funds and access lump sum amounts of credit without the hassle of physically transferring cash or other assets. 

5. Reduce disputes

The NI act 1881 provides a well-structured mechanism for resolving payment disputes that may arise from negotiable instruments. This includes issues of dishonoured cheques and other defaults. This saves the businesses from engaging in lengthy legal battles and helps recover the dues timely. 

Recent Amendments to the Negotiable Instrument Act

The Negotiable Instrument Act was last amended in 2018, and two provisions, Section 143A and Section 148 were added. The new sections dealt with the issue of delaying the instruments and trying to use dishonoured cheques and solidified the enforcement of section 138 of the Act.

Let’s look at the sections one by one, starting with Section 138 and then new ones, to understand how they helped improve enforcement. 

Recent Amendments to the Negotiable Instrument Act


Section 138:

Section 138 of this act deals with the offence of dishonour of cheques. In layman’s terms, if a person issues a cheque and the bank returns it without payment (what we call getting bounced) due to reasons such as insufficient funds, the issuing person will be liable for committing an offence under section 138. 

As a punishment, the person might get imprisoned for up to two years or pay a fine that is double the amount of the cheque they issued or both. Surprisingly this offence falls under the criminal matter and not civil. 

This act also states that the cheque must be presented to the bank within a period of six months from the date of issuance or the period of validity. 

Section 143A:

This new section was added in 2018 to provide relief to the payee in case of a cheque bounce due to a digital transaction. According to this new section, the payee can avail of this opportunity by filing an interim application in court. 

If the court finds the application genuine, the drawer will need to pay up to 20% of the cheque amount to the payee as compensation within sixty days of the order. This section aims not to make the drawer liability free but to give the payee an effective and speedy remedy. 

Section 148:

This latest amendment talks about the court’s power to decide the interest rate in the case of dishonoured cheques. According to it, the court can award the payee with interest from the date of the cheque bounce till the date of judgment. 

However, the court can not exceed the interest rate specified in the cheque or the current bank rate of RBI plus 2%. 

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To sum it up, the Negotiable Instrument Act ensures that the transfer of negotiable instruments is efficient and simple, thus helping borrowers and lenders to transfer money easily. The different types of negotiable instruments discussed help in gaining an understanding of the business and legal transactions carried out in India. 

The recent amendments to the act help in the secured money transaction, and the easy negotiability reduces the hassle of excess paperwork that might be present during a monetary transfer. We hope our blog was able to offer you more insight towards a better understanding of negotiable instruments.

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What is the total number of sections in the Negotiable Instrument Act of 1881?

As of 2019, there are seventeen chapters in this act with 148 subsections that provide an understanding of business and legal transactions.

What are the three main features mentioned in the Negotiable Instrument Act of 1881?

The three main features of a Negotiable Instrument include it, it must be in writing, it must be easy to transfer, and it must carry the tie of payment. If an instrument carries all these characteristics, then only we can call it a Negotiable Instrument.

What type of Negotiable Instrument is used in banking?

Cheque is the type of Negotiable Instrument used in banking; in fact, it is the most used instrument of all.

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