Dishonour of cheque is a considered to be an criminal act under Indian Law, when the return of the cheque by the Bank is due to insufficient funds. It is covered under Negotiable Instrument Act, 1881 and provides for imprisonment upto 2 years and/or fine, which may extend to twice the amount of the cheque. Previously, the cheque bouncing act was covered under section 420 of Indian Penal Code but the offender used to get away with civil liability. Therefore, with a view to provide strict punishment, the Negotiable Instrument Act was amended in 1988, with the insertion of chapter XVII under the Negotiable Instrument Act, 1881.

Essential Conditions u/s 138 of the Act:

a) A cheque must have been drawn by a person on an account maintained by him for payment of any sum of money to another person from out of the account;

b) The cheque must have been issued for the discharge, either in whole or in part, of any debt or other liability, though, in the absence of proof to the contrary, it shall be presumed that it was issued for the same;

c) The cheque shall be returned by the bank unpaid –

i) either because of the reason insufficient funds to honour the cheque; or

ii) because it exceeds the amount arranged to be paid from the account by an agreement with that bank.

d) The stop payment of cheque is also covered under said provisions, as it points to the dishonest intention of the drawer.