UPSC » UPSC CSE Study Materials » Law » Negotiable Instrument Act 1881

Negotiable Instrument Act 1881

It is a law concerning all the negotiable instruments, i.e., promissory notes, bills of exchange, and cheques. The word instrument states a document transferable from one party to another.

The legal definition of negotiable is that anything can be transferable from one party to a different party with the help of delivery so that the title can pass with or without the seal of approval to the transferee.

The law concerning negotiable instruments is the law of the industrial world

which was practised to facilitate the activities in trade and commerce, creating

provision or giving holiness to the instruments of credit that can be deemed

to be convertible into cash and easily transferable from one person to another.

  In the absence of these instruments, trade, and commerce activities were likely to

be negatively affected. It was not practicable for the traders to carry

the huge amount of currency in force. The supply of Indian law relating to

such instruments is avowedly the English Common Law. The significant objective of

the Act is to legitimise the system by which instruments contemplated by it could

pass from one person to another by negotiation like any other goods.

The Law in India concerning negotiable instruments is contained in the Negotiable

Instruments Act, 1881. This Act is made to define and change the law relating to

Promissory Notes, Bills of Exchange, and Cheques. The Act applies to the whole

of India. However, nothing herein contained affects the RBI(RESERVE BANK OF INDIA)Act,

1934, or affects any usage of any instrument in an oriental language.

Some usages may be excluded by any words in the body of the

the instrument that indicates an intention that the legitimate relations of the parties

thereto shall be ruled or governed by this Act, and it shall come into force on the 1st

of March 1882.

The provisions of this Act apply to Hundis unless there is a local neighbourhood: Multiple native instruments like Treasury Bills, Bearer debentures, etc., are also negotiable instruments either by mercantile custom or under different enäctments.

Check the complete UPSC Syllabus

Recent developments:

The Act was amended multiple times. Recently three amendments were made.

The Amendment Act 2018 has two significant changes – the introduction of

Section 143A and Section 148 always provide interim compensation

during the unconcluded period of the criminal complaint and the criminal appeal.

Visit to know more about UPSC Preparation Books


A Negotiable Instrument is a document freely transferable by trade customs from one person to another by delivery or by endorsement. The property in such a document was transferred to a bonafide transferee for value.

The Act does not define the term ‘Negotiable Instruments’ but section 13

of the Act provides for only some kinds of negotiable instruments, i.e., promissory notes and cheques, bills of exchange, which are payable either to order or



According to section 4 of the NI Act, 1881, A promissory note is a negotiable instrument in writing and is not a banknote or a currency note. The person who has to pay is called the Maker. He is the debtor, and he shall sign on the instrument. The person willing to collect the money is called Payee or the creditor.


A bill of exchange is an instrument that has an unconditional

order directly signed by the Maker, directing a certain person to pay a certain sum of

money only to, or to the order of, a specific person or the owner of the instrument.


A cheque is a bill of exchange on a selected banker and not expressed

to be payable other than on-demand, and it contains a cheque in the electronic form or the electronic image of a cheque.

Let us have a look at the purpose of the Negotiable Instrument Act.

This Act aims to create legitimate provisions for the negotiable instruments system currently in operation in the whole country. The regulatory laws would systematically organise the system, and the Act would define a decisive authority to decide any issues relating to negotiable instruments. 

  • The Act defines every topic concerned to the negotiable instruments for better vision and understanding.
  • The Act provides the penal provisions for effectively implementing the negotiable instruments process between two parties. If any party breaches its obligation or there is nonfulfillment of the said duty, it may be charged with offences leading to imprisonment. 
  • It protects the right of the parties when they discharge their obligations diligently. 
  • It mentions different conditions about the transaction systems and lays down its specific provisions.
  •  The Act discards all types of discrepancies or hurdles between the parties. In case of disputes, the parties must undergo the established provisions and legally resolve the matter. 

Also read UPSC Notes

Significant characteristics of negotiable instruments Act;

The instrument holder is assumed to be the owner of the property contained in it. They are completely transferable.

A holder in due course gets the instrument free from the defects of title of any previous holder. 

The holder, in due course, is permitted to use the instrument in his name. The instrument is transferable till it gets matured. Certain equal assumptions apply to all negotiable instruments unless the contrary is proved.


This Act is a keystone in economic and finance-related matters. It is a warning for all the persons who would face any wrongs concerning monetary dealings if mentioned in the Act. After getting a few aspects of the provisions, it is doubtless that the country’s law is highly stringent towards any kind of discrepancies or any voluntary wrong committed by the people.

The Act was amended from time to time to mitigate the financial cases. The Act also helps the Indian citizens develop the ease of doing any business as there would be a decrement in case of any disputes between the two parties, and it can be solved through the legislation and some other process. Some major provisions added after the amendment are a boon for diligent people.


Frequently asked questions

Get answers to the most common queries related to the UPSC Examination Preparation.

What is a negotiable instrument?

Ans. Sections 121 to 130 deal with all the offences against the state.


Ans- It was passed in 1881

What are the three types of negotiable instruments?

Ans – There are three types of negotiable instruments: promissory note, cheque, and bills of exchange....Read full