Chit Funds

What is a Chit Fund?
Chit funds are a type of savings scheme practiced in India, it’s also known as Chit/Chitty/Cure. Type of organization that manages conducts/supervises such a chit fund, according to Sec 2 (b) of the Chit Fund Act, 1982.

  • “Chit means a transaction, whether called chit or by any other name by or under which a person enters into an agreement with a specified number of individuals.
  • Every one of them shall subscribe a certain sum of money by way of periodical installments over a definite period and that each such subscriber shall, in his turn.
  • Determined by lot or by auction or by tender or in such other manner as may be specified in the chit agreement, be entitled to the prize amount”.
  • In some variations of chit funds, the savings are for a specific purpose

Who conducts the chit fund schemes?

  • Organised financial institutions,
  • Unorganized schemes (between friends or relatives).
  • Chit funds also played an important role in the financial development of people of the south Indian state of Kerala, by providing easier access to credit.
  • In Kerala, chitty (chit fund) is a common phenomenon practiced by all sections of the society. A company named Kerala State Financial Enterprises Ltd. exists under the Kerala State Government.

What are the benefits?

  • Chit fund is a unique financial concept, which has the flexibility to borrow or save. By paying one-month installment amount, a person can get to borrow from the chit value, by offering a discount not exceeding the maximum limit ascertained in the chit agreement.       

Example: In a chit value of INR. 100,000 for a period of 50 months, first, the subscriber can get an amount of 55000/-by paying only INR. 2,000 and remaining installments he pays over a period of 50 months. The rate of borrowing is much cheaper than several other financial schemes.

  • The non-prized subscriber who is a saving member up to the last installments gets the dividend which is comparatively higher than the interest that is accrued by way of Recurring Deposit Schemes.
  • The purpose of drawing the prized amount need not be disclosed. It can be used for any need by the member.

Example: House construction, Marriage, Education, Expansion of business, buy a Computer or any other purpose at his discretion.

What are the limitations?

  • No security in unregistered fund companies. More chances of getting duped as fraud
  • Organizer gets more benefit from your savings
  • No guarantee of fixed returns sometimes auctions too.
  • Interest earnings are lower than bank FDs
  • A very thin layer of protection

Different Types of Frauds in Chit Funds
Chit fund frauds have become a major issue and happen for various reasons, such as:

  • The foreman/fund manager disappears with the corpus amount.
  • A member could default in installment payment or disappear after winning the first bid.
  • The discount rate might be rigged, and a desperate member might end up paying a higher discount.

Income Tax benefits from saving or borrowings:
The dividends earned in a chit are not taxable. If you want to claim the bid as a loss, then these dividends must be shown as revenue income in the assessment. Hence the entire dividend earned in a chit is not taxable if you don’t claim the bid amount as a loss.


How does a Chit work?

  • The amount of a said scheme is called the chit value.
  • The duration of the scheme is known as term period.
  • The people who are interested in investing in the scheme are called subscribers.
  • The amount to be saved every month by the subscriber is known as a subscription.
  • The person or company operating the chit fund is known as the foreman.

Who can become a member?

  • No particular qualifications for eligibility, anyone can be a member who has the regular income.

Can one become a subscriber to a chit jointly with someone in the family?

  • Yes, one can have a chit fund in joint name with any family member or a friend.
  • The prize amount in such case is given in the manner in the ratio of subscription to the subscribers individually or in any one name as may be given in writing to the Company.

What is the procedure to participate in the auction?

  • A person can participate in the chit fund auction with payment of installment at the company premises as predetermined, at the Date, Time and Venue of the auction.
  • The subscriber can also authorize his representative by a written authority to participate in the auction. The subscriber who offers the maximum bid is declared as the winner.

What is Bid Amount?

  • The auction is a procedure for identification of the non-prized subscriber who wants to take a chit amount at the highest permissible discount.
  • All non-prized subscribers who have paid their installments up to date can participate in the auction for bidding up to the highest auction discount, within a period of five minutes allowed for each auction.

What is “Open Bid”?

  • When there is no member of the chit group who is willing to receive the prized/bid amount at the maximum allowable discount, the bidding for the chit comes in for open bid auction. This is known as Open Bid.

What is the time to get the chit after the auction?

  • The prize amount is payable latest before the next auction date, provided some surety/security is given by the prize bidder for the proper repayment of the future installment.

How the payment to be made? 

  • Through cash, cheque, NEFT, RTGS depends on the scenario.
  • Many subscribers prefer to give Post Dated Cheques for the entire duration of the chit.

What is the duration of the chit?

  • Duration of chits are normally 20 months, means a number of members and number of installments will be same.

Are chit funds not affected by market fluctuations? 

  • It inculcates the habit of compulsory and regular savings. 
  • It earns dividends every month. So, the net rate of return proves to be attractive.
  • It is much easier and faster to get a lump sum loan than a regular bank in case of an emergency. 
  • From a low-income homemaker to a businessman, anybody can join a chit fund.

Why should one subscribe?

  • Of course, every person thinks that need some security for future requirements and demands.
  • One has the compulsion to think of contingencies of future such as for Health, Property, and Marriage or for any other type such as Future Business Investments etc.
  • Best role in chit fund is that unlike the other sources of investments such as banks or any other investment, in which one can get back what one has invested; in chit fund, you can borrow from your future savings.

If the subscription is delayed beyond the auction date?

  • Non-payment of the chit installment by the due date will result in late fees.
  • Repeated delays in subscriptions or other irregularities like dishonored cheques may adversely affect your creditability.
  • Even result in forfeiture of your dividend or cancellation of your chit, as per the terms of the chit agreement.

Is it better to procure funds from chits when compared to other intermediaries? 

  • Service is more personalized, and formalities are simpler when compared to Banks and other Institutions. Evaluation is intrinsic when compared to the elaborate paperwork, as practiced in the formal sector. Last and not the least, the saving rate is higher and borrowing cost much lower.

If the subscriber wants to cancel the chit?

  • Subscriber must know that only non-prized chits can be canceled. Prized chits can be pre-matured only on the condition that all pending and future installments of the chit are paid in advance.
  • A non-prized subscriber can withdraw their subscription by a written request to the Company.

What are the benefits of joining a Replace Member?

  • All the dividends receivable till the date of joining the group are earned by the member joining a vacant.

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