Everything You Need to Know About Section 25 of the Payment and Settlement Systems Act

Here is the section in plain words, clause by clause.

• 25(1): If an electronic funds transfer fails because the account doesn't have enough money, the person who started the transfer can be punished. That means jail of up to 2 years, a fine of up to twice the transfer amount, or both.
• 25(1)(a) to (d): This only applies if all four conditions hold. The transfer was meant to pay a debt. It followed the payment system's rules. The receiver sent a written demand within 30 days of hearing about the failure from the bank. And the payer did not pay within 15 days of getting that demand.
• 25(2) and (4): The court assumes the payment was for a debt, and that the bank's failure message is proof of the bounce, unless you show otherwise.
• 25(5): The cheque bounce chapter of the Negotiable Instruments Act applies to these cases as far as it fits.

The 15-day window is the part to act on. Paying the amount demanded within those 15 days means the last condition is never met.

All four of these have to be true together, taken directly from the Act's text:

1. The electronic funds transfer was initiated to pay another person, in whole or in part, for a debt or other liability, specifically a legally enforceable one.
2. The transfer was initiated in accordance with the relevant procedural guidelines issued by the system provider (the bank or payment platform running the transfer).
3. The beneficiary gives written notice demanding payment within 30 days of learning from the bank that the transfer was dishonoured.
4. The payer fails to make the payment within 15 days of receiving that notice.

The Act is explicit that if even one of these isn't met, there's no offence; this isn't a grey area; it's a complete defence built into the law itself. Because all four conditions have to line up, a missed EMI does not automatically become a Section 25 case. What typically happens the first time an EMI bounces looks nothing like this: penalty fees and follow-up calls, long before anything resembling a Section 25 notice comes into play.

When the envelope arrives, look for these five details first:

1. Who is complaining. Usually the bank or NBFC, sometimes through its lawyer.
2. The amount demanded. Check it against your own EMI and bank statement.
3. The date the transfer failed. This decides whether the 30-day notice rule was met.
4. The deadline to pay. Count 15 days from the day you received the notice, not the date printed on it.
5. A contact for payment or settlement. Write back to this address, and keep a copy.

If any detail looks wrong, say so in your written reply. Ask for the bank's return memo or failure message if it isn't attached.

Read the notice carefully. Confirm the sender, the exact amount claimed, and the date of the dishonour.

Do not ignore the 15-day window. Silence doesn't make the notice go away; it just lets the clock run out.

Check whether all four conditions actually apply to your case. Missing even one changes everything.

If the debt is genuine and unpaid, contact the lender or a debt resolution service before the 15 days lapse. Paying or arranging a settlement within that window can stop the matter from advancing further. This is also where FREED Shield's Legal Notice Support can help confirm what the notice actually requires.

Keep every communication in writing. Notices, replies, and any settlement discussion, all of it.

For the different notice types lenders send and how to read each, see our guide to the legal notice for loan recovery.

• A transfer that failed due to a technical or bank-side error, rather than insufficient funds in the account.
• A voluntary transfer with no debt repayment attached to it at all.
• A payment that is not made to discharge a legally enforceable debt or liability.
• Any case where the beneficiary skipped the 30-day notice step, or the payer was never actually given the 15-day window to pay.

None of this is a loophole to hunt for; it's simply what the four-condition test already excludes by design. A lot of what circulates about Section 25 online oversimplifies this. Here are the most common myths.

For the wider picture of what lenders can and cannot do over a defaulted loan, read our guide on personal loan default and legal action.

Myth: Every bounced EMI leads to a Section 25 case. Fact: Only when all four conditions are met and the beneficiary actively pursues a written notice and, later, a complaint. Most bounced EMIs never get anywhere near this. Myth: Not knowing your account balance was low is a valid defence. Fact: The Act explicitly rules this out. Whether you had reason to believe your balance was insufficient at the time doesn't matter; it isn't a defence. Myth: UPI failures are always covered under Section 25. Fact: Only when the UPI transfer was specifically made to repay a legally enforceable debt. A failed UPI payment for daily spending, groceries, and a subscription sits outside this section entirely. Myth: This always ends in a criminal case. Fact: A lender may choose to pursue recovery or settlement before litigation, since litigation is slower and costlier for the lender too.

FREED Shield, specifically its Legal Notice Support component, is available to everyone, including people not currently enrolled in any FREED program.

FREED has an in-house legal team, not external lawyers on retainer, that reviews the notice you've received, including a Section 25 notice, and explains what it means for you. If a reply is needed, the team helps you draft it. FREED Shield helps ensure that customers don't have to face recovery-related pressure alone.

It's worth being precise about the boundary here: this is support before litigation starts.

If the notice traces back to debt you genuinely can't repay, that's a different and more fundamental problem than the notice itself. FREED's Debt Resolution Program exists for exactly that situation, since responding to the notice without addressing the underlying debt just delays the next one.

RBI said in 2011 that Section 25 gives the same rights and remedies as Section 138. So the steps are almost the same. For the cheque side, read our guide on the Section 138 demand notice.

It can. If your EMI goes out through an auto-payment permission (NACH or ECS mandate) and it fails because the account is short, the lender may treat it as an electronic funds transfer under Section 25.

• Auto-debit EMI that bounces: this falls under Section 25 of the PSS Act. The lender has to send you a written demand, and you get 15 days to pay.
• Post-dated EMI cheque that bounces: this falls under Section 138 of the NI Act instead, with the same 15-day window.

Either way, a notice is not a conviction. It's a formal demand. Most of these are resolved by paying the bounced amount, or by agreeing a written plan with the lender, before anything reaches a court.

The bounce also brings bank charges and a late mark if the EMI stays unpaid. Our page on what happens when an EMI bounces covers the charges, and our guide to bounced cheques and CIBIL explains the credit report side.