30/03/2017
Chit means a transaction which a person enters into an agreement with a specified of persons that 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, as determined by lot or by auction or by tender as may be specified in the chit agreement, be entitled to the prize amount"
A chit fund is a kind of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises a chit scheme. It is regulated by provisions of Chit Fund Act, 1982.
How does this work?
There is a new chit group that is commencing. The value of the chit is 500,000. This amount is known as the Chit Value.
For the purpose of this illustration, we will consider the duration of the chit to be 50 months. This is known as term period for the chit group.
Chit Fund Company has to gather 50 people who are interested in investing in this chit group. These 50 persons are called Subscribers.
Once the chit group commences, the foreman has to register the chit with the registrar of chits. He has to pay 100% of the chit value as security. This amount can be withdrawn only after the said chit group closes and every subscriber is paid what is due to him or her. This regulation protects the interests of the subscriber to a certain extent.
The amount to be saved every month by the Subscriber is Chit value/No of person’s i.e. 500,000/50 = 10,000. This is also known asMonthly Subscription. It may be noted here that the number of persons investing in a chit and the duration of the chit is always the same. The maximum monthly contribution or Subscription Amount that a Subscriber will pay is 10,000.
Personal Savings: How do chit funds work?
What exactly goes on behind the scenes when a chit fund is run? Who gets paid how? What exactly is the pattern of money flow?
Promoted by Squadhelp
Launch a naming contest for your startup. Get 100s of name ideas.
Crowdsource to 100s of naming experts and get catchy name ideas within hours. Trademark & URL checked.
Learn More
10 ANSWERS
Pavan Jayaprakash
Pavan Jayaprakash, Chartered Accountant- Life beyond numbers
Written 22 Jun 2014
Chit means a transaction which a person enters into an agreement with a specified of persons that 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, as determined by lot or by auction or by tender as may be specified in the chit agreement, be entitled to the prize amount"
A chit fund is a kind of savings scheme practiced in India. A chit fund company is a company that manages, conducts, or supervises a chit scheme. It is regulated by provisions of Chit Fund Act, 1982.
How does this work?
There is a new chit group that is commencing. The value of the chit is 500,000. This amount is known as the Chit Value.
For the purpose of this illustration, we will consider the duration of the chit to be 50 months. This is known as term period for the chit group.
Chit Fund Company has to gather 50 people who are interested in investing in this chit group. These 50 persons are called Subscribers.
Once the chit group commences, the foreman has to register the chit with the registrar of chits. He has to pay 100% of the chit value as security. This amount can be withdrawn only after the said chit group closes and every subscriber is paid what is due to him or her. This regulation protects the interests of the subscriber to a certain extent.
The amount to be saved every month by the Subscriber is Chit value/No of person’s i.e. 500,000/50 = 10,000. This is also known asMonthly Subscription. It may be noted here that the number of persons investing in a chit and the duration of the chit is always the same. The maximum monthly contribution or Subscription Amount that a Subscriber will pay is 10,000.
The Subscriber does not always pay the entire Subscription amount every month. Let us find out how and why he does not have to pay the entire amount.
The maximum discount or maximum bid permitted ranges from 30-40%. For the purpose of this illustration we will assume that a Subscriber has bid 35% of the chit value. 35% of 500,000 is 175,000. This amount is known as Chit Discount.
The foreman charges 5% of chit value as commission. In this illustration, that would amount to 25,000. This is deducted from Chit Discount i.e. 175,000-25000=150,000. This amount is available for equal distribution among the subscribers.
In our example, 150,000 would be divided equally among 50 subscribers. Each subscriber would get a discount of 150,000/50 = 3000. This amount is known as Dividend.
In the following month, all subscribers would have to only pay 7,000 instead of 10,000. This is because they have earned a chit discount of 3000.
Depending upon the competition within the chit group the discount percent would vary. The least discount would be 5% which is the foreman’s commission. The bidding process will continue until the end of the chit period.
In this manner, the subscribers can borrow more than what they paid in the first half period of the chit term and save their money if they decide wait further into the chit period.
Get the latest news on business, finance, politics from Livemint, the website of the Mint newspaper, one of India's leading business and financial dailies
