What is a Chit Fund?

A chit fund is a type of investment in which members agree to come together and deposit a pre-agreed amount of money in a pot. Later up, out of this pot, the member who bids the lowest amount for the pot will get the money.

How will you decide who will get the Chit?

Winners of chit are chosen in one of the following ways:

  • By Auction
  • By Lottery

How does it work?

  • Every Chit fund Scheme will have fixed numbers of subscribers
  • The scheme will run for months equal to the Subscriber.
  • So, if there are 12 subscribers, the scheme will run for 12 months.
  • Organizer Company will also be one subscriber.

Let’s take an example to understand its working:

If we start chit fund scheme with 30 members, each paying monthly installment of Rs. 10000, the first month’s corpus will be Rs. 300000. This collected amount is called pot or chit box. Bidding of this box is done among these members. At the time of the auction, whichever member bids the maximum discount gets to take home the amount called prize money. Suppose the member who needed the money has taken Rs. 210000, then the remaining amount will be distributed among the rest of the members.  Rs. 90000 is the discount amount. This amount is loss for the member who has taken Rs.210000, while it is a profit for the rest of the members. Out of Rs. 90000, the subscriber will deduct his commission. Suppose the subscriber’s commission is 5%, the 5% of Rs. 300000 becomes Rs. 15000. The remaining Rs. 75000 (Rs. 90000-Rs. 15000) will be distributed equally among all the members. Everyone got a profit of Rs. 2500 on an investment of Rs.10000.

Who is the Regulatory authority for Chit Fund in India?

  • Chit Fund Business in India is regulated by Chit Funds Act, 1982.
  • It extends to the whole of India except the state of Jammu and Kashmir.
  • No chit fund shall be conducted without obtaining the previous sanction of the state government.
  • Sanction obtained shall lapse if the chit is not registered within 12 months from the date of such sanction or within such further period not exceeding 6 months in the aggregate as the state government may, on application made to it in this behalf, allow.
  • An application for obtaining a sanction shall be made by the foreman.
  • No person shall issue or cause to be issued any notice, circular or any other document inviting the public to subscribe for the tickets in any chit fund unless such notice, circular or any other document contains a statement that the previous sanction required has been obtained.

Form of Chit Agreement

  • Every Chit agreement shall be in duplicate and shall be signed by each of the subscriber or by any person authorized by him in writing and the foreman and attested by at least two witnesses.
  • The duration of Chit shall not extend beyond a period of five years from the date of its commencement.
  • The State Government may permit the duration upto a period of 10 years if it is satisfied that it is necessary so to do.
  • The amount of discount shall not exceed the 30% of the Chit amount.

Filing of Chit Agreement

  • Every Chit Agreement shall be filed in duplicate by the foreman with the registrar.
  • The Registrar shall retain one copy of agreement and return the duplicate to the foreman with an endorsement that the chit agreement has been registered.
  • Endorsement made shall be conclusive evidence that the chit fund is duly registered under this Act.

Provisions for Continuation in certain cases

  • Where a foreman dies or becomes of unsound mind or is otherwise incapacitated, the chit may continue in accordance with the provisions of the chit agreement.
  • Where a foreman is adjudicated an insolvent, or withdraws from the chit under section 26, or fails to conduct the chit at any installment or on any other date before the next succeeding installment as may have been agreed upon by a special resolution, any one or more of such subscribers authorised by such resolution may, in the absence of any provision in the chit agreement for the future conduct of the chit, take the place of the foreman and continue the chit or make other arrangements for the further conduct of the chit.

Termination of Chit

A chit shall be deemed to have terminated:

  • When the period specified therefore in the chit agreement has expired provided the payment of dues to all the subscribers has been completed; or
  • when all the non-prized and unpaid prized subscribers and the foreman consent in writing to the termination of the chit and a copy of such consent is filed with the Registrar as required under section 41; or
  • Where a foreman dies or becomes of unsound mind or is otherwise incapacitated and the chit is not continued in accordance with the provisions of the chit agreement

Winding up of chit fund:

A chit may be wound up by the Registrar within whose territorial jurisdiction the chit has been registered, either on his own motion or on an application made by any non-prized or unpaid prized subscriber:

  • If the chit has terminated under clause (c) of section 40; or
  • If the foreman commits any such act in respect of the security specified in section 20 as is calculated to impair materially the nature of the security or the value thereof; or
  • If he fails to deposit any amount required to be deposited under any of the provisions of this Act; or
  • If it is proved to the satisfaction of the Registrar that the foreman is unable to pay the amounts due to the subscribers; or
  • If the execution or other process issued on an order passed by the Registrar in favor of any subscriber in respect of amounts due to him from the foreman in relation to the chit business is returned unsatisfied in whole or in part; or
  • If it is proved that there has been a fraud or collusion on the part of the foreman in the matter of taking securities from any prized subscriber; or
  • If the foreman has appropriated the prize amount in his capacity as a subscriber without furnishing sufficient security for future subscriptions; or
  • If the Registrar is satisfied that the affairs of the chit are being conducted in a manner prejudicial to the interests of the subscribers; or
  • If it is just and equitable that the chit should be wound up. 

All about Chit Fund in India

Non Applicability of the Act:

Nothing in this Act shall apply in respect of :

  • any chit started before the commencement of this Act; or
  • any chit the amount of which, or where two or more chits were started or conducted simultaneously by the same foreman, the aggregate amount of which does not exceed one hundred rupees.
  • No bank shall commence or carry on chit business after the commencement of this Act.

 Some Important Points:

  • A company shall not commence or carry on chit business unless it has a paid-up capital of not less than rupees one lakh.
  • No person shall carry on chit business unless he uses as part of his name any of the words “chit”, “chit fund”, “chitty” or “kuri” and no person other than a person carrying on chit business shall use as part of his name any such word.
  • Every company carrying on chit business shall create and maintain a reserve fund and shall, out of the balance of profit of each year as disclosed in its profit and loss account and before any dividend on its shares is declared, transfer to such reserve fund, a sum equal to not less than ten per cent of such profit.
  • No company shall appropriate any sum or sums from the reserve fund except with the prior approval of the Registrar.
  • Except with the general or special permission of the State Government, no company carrying on chit business shall conduct any other business.
  • No foreman, other than a firm or other association of individuals or a company or co-operative society, shall commence or conduct chits, the aggregate chit amount of which at any time exceeds twenty-five thousand rupees.
  • Where the foreman is a firm or other association of individuals, the aggregate chit amount of the chits conducted by the firm or other association shall not at any time exceed Rupees One lakh, where number of partners is not less than four and Rupees twenty five Thousand in any other case.
  • The minutes of the proceedings of every draw shall be prepared and entered in a book to be kept for that purpose immediately after the closure of the draw and shall be signed by the foreman, the prized subscribers, if present, or their authorised agents, and at least two other subscribers who are present.
  • A true copy of the minutes of the proceedings of every draw certified as such by the foreman shall be filed by the foreman with the Registrar within twenty-one days from the date of the draw to which it relates .
  • Without prejudice to the provisions of the Companies Act, every foreman shall prepare and file with the Registrar within such time as may be prescribed, a balance sheet as on the last date of each calendar year, or, as the case may be, the financial year of the foreman, and a profit and loss account relating to the year of account, in the forms set out in Parts I and II of the Schedule.
  • All the records pertaining to a chit shall be kept by the foreman for a period of eight years from the date of termination of the chit.
  • The Registrar or an officer authorised by the State Government in this behalf may inspect chit books and all the records of a chit during working hours on any working day at the premises of the foreman with or without giving notice.
  • Under the provisions of section 45N of the Reserve Bank of India Act, 1934 (2 of 1934) Reserve Bank has power to inspect the books and records of any foreman.

Tax Implications:

  • Dividend is neither taxable nor tax deductible.
  • Overall loss is allowed as business expenditure u/s 37.
  • Overall gain is taxable as income from other sources.

Accounting treatment of chit funds in India

In India, chit funds are regulated by the Chit Funds Act, 1982. The accounting treatment of chit funds in India follows specific guidelines outlined by the Act and generally accepted accounting principles. Here’s how chit funds are typically accounted for in India, along with examples:

  1. Initial Contributions by Members: When members join a chit fund, they contribute a certain amount of money to the common fund. This amount is recorded as a liability under the “Chit Fund Liability” account. For example, if there are 20 members and each contributes Rs. 10,000, the initial entry could be:
    Chit Fund Liability Cash/Bank
    Rs. 2,00,000 Rs. 2,00,000
  2. Chit Fund Auctions or Draws: At the end of each period, an auction or draw is conducted, and one member receives the fund. The amount received by the member is treated as an expense and is deducted from the chit fund’s cash or bank balance. Let’s say the winning bid is Rs. 15,000. The entry could be:
    Chit Fund Expense Cash/Bank
    Rs. 15,000 Rs. 15,000
  3. Chit Fund Charges or Commissions: Chit funds charge a commission for managing the fund and conducting the auctions. This commission income is recognized when earned. Let’s say the chit fund charges a 5% commission on the total fund value, which is Rs. 2,00,000. The entry could be:
    Commission Income Chit Fund Liability
    Rs. 10,000 Rs. 10,000
  4. Member Defaults or Advances: If a member defaults on their contributions or takes an advance, these transactions are accounted for accordingly. For example, if a member defaults on a Rs. 10,000 contribution, it could be written off as bad debt:
    Bad Debt Expense Chit Fund Liability
    Rs. 10,000 Rs. 10,000
  5. Final Distribution of the Fund: Once all members have received their share of the fund, the chit fund is concluded. The final distribution is accounted for by reducing the chit fund liability and the corresponding cash or bank balance. Let’s say the final distribution to a member is Rs. 1,80,000:
    Chit Fund Liability Cash/Bank
    Rs. 1,80,000 Rs. 1,80,000

Remember that these examples provide a simplified illustration of the accounting entries for chit funds. The actual accounting process may involve more complexity and additional entries depending on the specific transactions, commissions, defaults, and regulatory requirements.

Additionally, it’s crucial to maintain proper documentation, comply with the Chit Funds Act, and consult with accounting professionals who are familiar with Indian accounting regulations to ensure accurate and compliant accounting treatment of chit funds.


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Location: Ludhiana, Punjab, India
Member Since: 29 May 2022 | Total Posts: 2

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