Chit Fund Company


chit fund is a type of rotating savings and credit association system practiced in Pakistan, India, Bangladesh, Sri Lanka and other Asian countries. Chit fund schemes may be organized by financial institutions, or informally among friends, relatives, or neighbours. In some variations of chit funds, the savings are for a specific purpose. Chit funds are often microfinance organizations.

Organised chit fund schemes are required to register with the Registrar of Firms, Societies and Chits. A chit fund company is a company that manages, conducts, or supervises such a chit fund, as defined in Section of the Chit Funds Act, 1982. 

According to Section 2(b) of the Chit Funds Act, 1982:

“Chit means a transaction whether called chit, chit fund, chitty, kuree or by any other name by or under which a person enters into an agreement with a specified number of persons that every one of them shall subscribe a certain sum of money (or a certain quantity of grain instead) by way of periodical instalments over a definite period and that each such subscriber shall, in his turn, as 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”

Though they are not required to be registered under the RBI Act, chit funds are regulated as Miscellaneous Non-Banking Companies (MNBCs). Their activities relating to soliciting deposits are governed by the Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules (1977) framed by the Government of India under Section 58A of the Companies Act 1956.

Other Names for Chit Funds

Chit funds are known by a number of names. 

  1. Internationally, chit funds are known as Rotating Savings and Credit Associations (ROSCA), this is because they provide a facility of saving and borrowing simultaneously.
  2. In India, they are called, chit, chitty, or Kuree. 

After the amendment of the Chit Funds Act in 2019, the following names have also been added. These are, 

  1. Fraternity Fund, or 
  2. Rotating Savings, or 
  3. Credit Institutions.

Features of Chit Funds

Chit funds have the following features:

  1. They have a predetermined value and duration. 
  2. They work like microfinance institutions.
  3. They combine both, credits and savings in a single scheme.
  4. They cater to the financial needs of low income households.
  5. They allow the deposits made by the contributors to be turned into a lump sum. This is done by three mechanisms.
  •  Safe Deposits: A person can deposit the money in the present and enjoy the lump sum in future.
  •  Loans: A person can take a loan in the preset and continue to make payments in the future.
  •  Insurance: Allows the depositor to enjoy the lump sum in case of an emergency.

They offer loan at a lower interest rate than moneylenders.

How does Chit Funds work?

Let us assume, a chit fund with 12 members, operating for 12 months with a monthly member contribution of Rs.10,000. 

The chit company would then collect Rs.120,000 every month and offer the amount in an auction, less the chit company fee and a discount. 

Thus, every month, the members receive the chit amount at Rs. 96,000 (10% chit company fee and 10% discount). 

If any one member would like to receive the auction, then he/she can receive the entire chit auction amount. If more than one person would like to receive the chit auction, then it selects the lucky member randomly. If no member wants to receive the chit auction, then if offering the chit amount without any discount at Rs.120,000 and it causes a reverse auction. The person offering the lowest amount will get the award of chit auction amount. In any case, every member of the chit receives the chit auction once, the chit discount is spread evenly amongst the members, and the chit company only earns a fee for operating the chit fund.


Risk Involved

Although there is a law governing the chit funds but still there are a lot of ‘kitty’ and ‘committees’ who operate on the chit fund model but are not regulated. This is the unorganised sector of chit fund. They can have their own modification in the model. Be it in depositing of installments or withdrawal method, unorganized chit funds customize according to their convenience.

Then again there is an organised sector which is operated and regulated according to the law and are regulated by the Chit Funds Act, 1982. There are very few companies who operate in the organised sector such a Shriram Chit Funds.

After the Saradha Scam in 2013, many people have lost faith in the chit fund scheme. Since even after the regulations there is a huge inherent risk of defaulters and organizer’s authenticity. The Act came into force in 1982 but the scam was exposed in 2013, which clearly reflects that even with the law in place, it is not stringent or regulated enough making chit funds a highly risky affair. Nevertheless it is still popular in the southern states.

Tax on Income from Chit Funds

The dividend income earned per month is neither tax deductible nor taxable.

The overall income is taxable as income from other sources.

The overall loss can be claimed as business loss.

How to start a Chit Fund Company?

To start a chit fund business in India, it is recommended that the promoters of the chit fund company first start a Private Limited Company with the objective of operating a chit fund business. After the incorporation of a private limited company, the company can apply with the relevant Chit Fund Registrar of the State to obtain registration. A chit fund business can commence only after obtaining chit fund business registration from the relevant State Registrar.

The documents required to register a Private Limited Company is:-

  1. Share capital amount and proposed ratio for holding shares.
  2. Two identity proof documents of Directors and Shareholders – Copy of Aadhaar Card/ Voter ID Card/ PAN Card (compulsory).
  3. Address proof of the Director or the Shareholder (Voter ID, Passport, Driving license, etc.)
  4. Ownership and sale deed (In case your own premise) and one address proof document of registered office (like water, telephone, mobile bill or copy of bank pass book or net banking statement mentioning address of the applicant).
  5. Name of the city where the registered office is located and address proof document for Registered Address of the company Any utility bill like water bill, electricity bill, property tax receipts or Gas Bill etc. is compulsory required for incorporation.
  6. Passport size photo of the proposed director & shareholders.
  7. In case the property is on rent then you need to submit a copy of the rent agreement with NOC from Landlord.
  8. Occupation details, Email address, Contact details of directors as well as shareholders.
  9. Affidavits for non- acceptance.
  10. MOA and AOA subscriber sheets.
  11. PAN Card of the company.
  12. Nationality proof of foreign national subscriber (if any).


Also some other notable points are:- 

  • Authorised and paid-up Share Capital: the earlier minimum number of the share capital was Rs. 1,00,000, but now there is no such minimum capital compulsion. The minimum share capital can be as prescribed by their Article of Association.
  • Activities of the Company: List of proposed activities of the company shall be prescribed in its Articles during incorporation.
  • Proposed Name of the company: a name of the company (name must be unique & not in general nature) and there should not be any existing company exits similar or same to the proposed name.


The procedure to register a Private Limited Company is:-

  1. Reservation of name for 20 days using the SPICE+ (INC-32) Application on MCA.
  2. File the following forms within next 20 days :-
  • INC-32 (SPICE+) – Incorporation form
  • INC-33 – e-Memorandum of Association
  • INC-34 – e-Articles of Association
  • INC-35 (AGILE PRO) Application for GSTIN, ESI pLus Epf, P.Tax Registration & Opening of Bank a/c
  • INC-9 – Declaration shall be submitted by each of the subscribers to the memorandum and each of the first directors named in the articles.
  • DIR-12 and DIR-2 – Particulars of first director of the company and his interest in other firms or body corporate along with his consent to act as a director
  • INC-22 – Filing of Registered Office Address
  1. Issue of Certificate of Incorporation by Central Registrar in Form No. INC-11 mentioning PAN of the company issued by Income-tax Department and CIN of the company allotted by Registrar.
  2. A declaration in Form INC-20A certified by CA, CS, CMA in practise is filed by a director within a period of 180 days of the date of incorporation of the company with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration and the company has filed with the Registrar a verification of its registered office in SPICE+ at the time of incorporation or INC-22 within 30 days of incorporation.


Note: Default in filing of Form INC-20A can lead to punishment. Company shall be punishable with fine which may extend to Rs. 50,000 and officer in default with a fine which may extend to Rs.1000 for every day for which such contravention continues to a maximum of Rs. 1,00,000.


  1. Now it is time to move to the chit registrar for chit fund registration. Please note that the chit registration with the relevant chit registrar is mandatory and you cannot begin your chit business by skipping this step.


Chit fund business registration can be cancelled in the following cases:-

  • Any person or entity convicted of any offence under the Chit Fund Act or under any other Act regulating chit business and sentenced to imprisonment for any such offence; or
  • Any person or entity who has defaulted in the payment of fees or the filing of any statement or  require record for the payment and filing process under this Act or had violated any of the provisions of this Act or the rules made thereunder; or
  • Any person or entity had convicted of any offence involving moral turpitude and sentenced to imprisonment for any such offence unless a period of five years has elapsed since his release.

Types of Chit Funds

Chit funds are of different kinds. These are:

Organized Chit Funds: In northern India, a common type of chit fund is where small paper chits with each member’s names are gathered in a box. When all the members come together for a monthly gathering, the person who is in charge in front of all the present members picks a chit from the box. The member so selected gets to take home the day’s collection. Afterwards, that person’s chit is removed from the box. The person who was previously selected comes to the meetings and pays his/her share, but his/her name will not be selected again.

Special Purpose Funds: Some chit funds are organized for a specific purpose. For example, Christmas gifts fund which has a very specific end date which is about a week before Christmas. Such a fund can reduce the cost and relieves the members from extra work in the busy festival season. Nowadays, such special purpose chit funds are conducted by, ladies wear shops, jewellers etc. to promote their goods.

Online Chit Funds: With the popularity of e-commerce, Chit funds are being organized online as well. Online chit funds are conducted online, and contributors can make their monthly contributions and receive the prize through online transactions including electronic funds transfer system. Each member gets his or her own online account to manage and circulate chit funds.

Registered Chit Funds: Registered chit funds are those funds which are registered with the state government under the Chit Funds Act, 1982. There are over 10,000 registered chit funds in India.

Unregistered Chit Funds: Unregistered funds are those which are not registered with any state government. They are not regulated under any law. 

Relevant Statute Governing Chit Funds

Chit funds companies in India are governed by various State or Central laws. Organized chit fund schemes are required to be registered with the Registrar of Firms, Societies, and Chits. The chit funds are governed according to the following laws:

  1. Union Government – Chit Funds Act, 1982 (Except the State of Jammu and Kashmir)
  2. Tamil Nadu Chit Funds Act, 1961
  3. The Chit Funds (Karnataka) Rules, 1983
  4. Delhi Chit Funds Rules, 2007
  5. Maharashtra Chit Fund Act, 1975
  6. West Bengal Protection of Interest of Depositors in Financial Establishments Bill, 2013
  7. Prize Chits and Money Circulation Schemes (Banning) Act, 1978


  1. Chit funds are easy to join.
  2. They promise high returns.
  3. The rate of interest of borrowing from chit funds is low.
  4. People of lower income households can also participate.
  5. Helps micro-enterprises to develop.


  1. High transaction cost.
  2. Chit funds have known to be vulnerable to scams. 
  • Saradha Chit Fund Scam: The scam was run by Saradha Group. The group collected 200 to 300 billion rupees before it collapsed in 2013.
  • Rose Valley Chit Fund Scam: The Rose Valley scam was a bigger financial fraud than the Saradha scam, more than Rs 15,000 crore was reportedly collected from depositors all across India.

Associated with a number of risks. They are:

  • The biggest risk involving a chit fund is the misuse of the pooled funds by the foreman. 
  • Sometimes members stop paying the dues and have already taken the first bid.
  • In certain chit funds, discount rate is rigged, and a desperate member ends up paying a higher discount.