Promissory Note vs Cheque vs Bill of Exchange — Key Differences Explained
The Negotiable Instruments Act, 1881 recognises three instruments: the promissory note, the bill of exchange, and the cheque. While all three involve the payment of money, they are used in very different commercial situations. Here is a clear, plain-language comparison.
For the complete guide to each instrument, read our Negotiable Instruments Act 1881 Complete Guide.
Quick Reference Comparison Table
| Feature | Promissory Note | Bill of Exchange | Cheque |
|---|---|---|---|
| **Defined in** | Section 4 NI Act | Section 5 NI Act | Section 6 NI Act |
| **Number of parties** | 2 (Maker + Payee) | 3 (Drawer + Drawee + Payee) | 3 (Drawer + Bank + Payee) |
| **Who pays** | Maker (makes a promise) | Drawee (after acceptance) | Bank (drawee is always a bank) |
| **Acceptance needed?** | No | Yes — drawee must accept | No |
| **Always demand payment?** | No (can be future dated) | No (can be future dated) | Yes — always payable on demand |
| **Drawee** | No drawee | Any person | Always a bank |
| **Stamp duty** | Required | Required | Not required |
| **Grace days** | 3 days | 3 days | None |
| **Criminal liability on dishonour?** | No (only civil) | No (only civil) | Yes — Section 138 NI Act |
| **Payable to bearer?** | Can be | Can be | Bearer cheque — yes; but RBI now restricts |
Promissory Note — In Plain Language
A promissory note is a written promise by one person to pay another.
Who uses it: Informal loans between individuals, loan agreements in small businesses, some financing arrangements.
Example: Ram borrows ₹1 lakh from Shyam and signs a promissory note saying "I promise to pay Shyam ₹1 lakh on 31 March 2026."
Key rules:
- Must be stamped (Stamp Act requirement — value depends on the amount and state)
- The maker is primarily liable
- No bank involved
- Dishonour gives the payee a civil remedy (suit for money) but NOT a criminal case under Section 138
When NOT to use a promissory note: If you want the protection of Section 138 (criminal liability for non-payment), use a cheque instead.
Bill of Exchange — In Plain Language
A bill of exchange is a written order by one person to another to pay a third person.
Who uses it: Primarily used in trade finance and export-import transactions. Banks use them for letters of credit. Also used in domestic trade credit.
Example: Exporter A (in Mumbai) sells goods to Buyer B (in Delhi). A draws a bill ordering B to pay ₹5 lakhs to Bank C (A's bank) within 90 days. B accepts the bill (signs it). The bank can now collect from B on due date.
The acceptance process: A bill of exchange must be presented to the drawee for acceptance. The drawee signs ("accepts") it, becoming the acceptor. Without acceptance, the drawee has no liability on the bill.
Trade Bills vs Accommodation Bills:
- Trade bill: Based on a real commercial transaction (goods, services)
- Accommodation bill: No underlying transaction — signed as a favour. Legally valid but courts look at them with scrutiny.
Key rules:
- Drawee must be a certain, identifiable person
- Acceptance creates primary liability on the acceptor
- 3 days of grace allowed after due date before dishonour
- Dishonour leads to civil liability — no Section 138 criminal remedy
Cheque — In Plain Language
A cheque is a bill of exchange where the drawee is always a bank, and it is always payable immediately on presentation.
Who uses it: Everyone — individuals, companies, for payments of all kinds.
What makes a cheque special:
- No acceptance needed — the bank (drawee) is not required to "accept" it before payment
- Criminal liability on dishonour — the revolutionary addition of Section 138 in 1988 made cheque dishonour a criminal offence
- No stamp duty — unlike promissory notes and bills, cheques do not require stamping
- Bearer or order — can be drawn payable to bearer or to a specific person
Types of cheques and safety:
The safest type for receiving payment is an Account Payee Crossed Cheque:
- Two parallel lines on the top left corner (crossed)
- Words "A/c Payee" or "Account Payee" written between the lines
- This cheque can only be deposited into the payee's own bank account — cannot be encashed at a counter or further negotiated
Post-dated cheques (PDCs): Very common in India for loan EMIs, rent, and business transactions. The cheque is valid on the date written on it — presenting it before that date is a bank error, not a legal right.
Which Instrument Should You Use?
Use a promissory note when:
- Giving or taking an informal personal loan
- You want a written record of a debt that will be repaid later
- No bank account involvement is necessary
Use a bill of exchange when:
- You are in trade/export-import
- You need the buyer to formally accept a credit obligation
- You are dealing with Letters of Credit
Use a cheque when:
- Making or receiving payment for any transaction
- You want criminal remedy if payment fails (Section 138)
- The transaction is commercial and documented
Use an account payee cheque when:
- You want maximum safety — the payment can only go into the payee's account
- You are making large payments
- You are a business making vendor payments
Why Section 138 Only Applies to Cheques
When the government added Section 138 to the NI Act in 1988, they chose to apply it only to cheques (not promissory notes or bills of exchange). The reason:
- Cheques are the most widely used commercial payment instrument
- Cheque dishonour was rampant and was undermining commercial confidence
- The criminal remedy was intended as a deterrent — making the drawer personally liable
- Promissory notes and bills are already governed by civil enforcement mechanisms
This means: if someone gives you a promissory note and doesn't pay, you file a civil suit. But if someone gives you a cheque that bounces, you can file both a civil suit AND a criminal case under Section 138.
Frequently Asked Questions
Can a bill of exchange be converted to a cheque? No. They are fundamentally different instruments. However, a bank draft (which is similar to a bill drawn by one bank branch on another) is sometimes loosely called a "banker's cheque."
Is a demand draft a promissory note or bill of exchange? A demand draft is most similar to a bill of exchange (drawn by one bank branch on another), but it is not technically covered by the NI Act provisions. It is a quasi-negotiable instrument governed by banking practice.
Can I file Section 138 if someone gives me a rubber cheque / post-dated cheque? Yes. Section 138 applies to post-dated cheques. The cheque must be presented after its date, dishonoured, and then the 30-day notice procedure applies.
What if someone gives me a promissory note that they refuse to honour? File a civil suit for recovery of money under Order 37 of the CPC (summary suit on negotiable instruments). No criminal remedy, but the court process can be faster than a regular money suit.