Chit Fund Company: Process, Application, Rules & Documents


A chit fund is a very popular type of savings scheme in India – in fact, it is one of the main parts of the unorganized money market industry. The chit fund company, which runs a chit fund, provides access to savings and borrowings for people with limited access to banking facilities. These chit funds are run by chit fund companies and in the article below we will look at the functioning of chit fund companies, the chit fund business model and the chit fund business registration in India.

What is a Chit Fund Company?

Any entity managing the scheme is typically referred to as a chit fund company. The individual participating in this scheme is referred to as the member. Such a company will commonly have many different schemes. Each of them will have a set of members and a limited duration.

These schemes are operated by the companies with the registration under relevant Chit Fund act. Operations typically involves floating of chit fund schemes, finding the potential members, enrolling the members into a chit, collecting the contributions, conducting the chit auctions, distributing the funds and then most importantly maintaining the books. The companies earn a fixed amount of the member’s contribution for operating the schemes.

To start with, such a company usually advertises a scheme and then starts to enrol members who are interested. All the schemes have a time period, contribution and a set of members. The number of members in the chit will equal to the time period, and each of these member will be required to contribute a fixed amount of money for each period.

Chit Fund Business Model

Let us assume that a fund is started with around 12 members, operating for 12 months with each member contributing Rs.10,000 monthly. The chit company will then collect Rs.120,000 every month and offer this amount in an auction, less the chit company fee and the discount. So, the chit will be offered each month to its members at Rs. 96,000 (10% is the chit company fee and 10% the discount).

If any one member is interested in receiving the auction, then she/he is allowed to receive the entire chit auction amount. If more than one individual would like to receive the chit auction, then one person is randomly selected as a luck member. If no member wants to receive the chit auction, then the chit is offered without any discount at Rs. 120,000 and then a reverse auction is conducted.

The individual offering the lowest amount is then awarded the chit auction amount. Anyways, every member of the chit receives the chit auction once, the chit discount is spread evenly amongst all the members and Chit Company only earns a fixed fee for operating the fund.

Chit Fund Registration

The business in India is regulated under the Chit Fund Act, 1982. According to the Act, a “chit” means a transaction whether called chit, chit fund, chitty, kuri or by any other name by or under which a person enters into an agreement with a specified number of individual that every one of them will subscribe to a certain sum of money (or instead a certain quantity of grain ) by way of periodical instalments over a definite time period and that each such subscriber will, in her/his turn, as determined by lot or by auction or by tender or in such other manner as may be specified in chit agreement, be entitled to prize amount. A transaction is not a chit if some alone, but not all, of subscribers get the prize amount without any liability to pay the future subscriptions or all the subscribers get the chit amount by turns with a liability to pay future subscriptions.

Though the chit fund companies are a category of Non-Banking Financial Companies (NBFC), the chit funds are exempt from being registered with the Reserve Bank of India. The chit funds are a category of NBFC which are regulated by the other regulators and hence exempt from the requirement of registration with RBI.

To start this business in India, it is suggested that the promoters of the chit fund company should first start a Private Limited Company with the aim of operating a chit fund business. Once the private limited company is formed, the company can then apply with the appropriate Chit Fund Registrar of the State to obtain the registration. A chit fund business can only be started after obtaining the chit fund business registration from the relevant State Registrar.

The registration will not be given to:

1. Any individual or entity convicted of any offence under the Chit Fund Act or under any other Act regulating the business and sentenced to imprisonment for any such offence; or

2. Any individual or entity who had defaulted in payment of the fees or the filing of any statement or the record required to be paid or filed under this Act or had previously violated any of the provisions of this Act or the rules made thereunder; or

3. Any individual or entity had been convicted of any offence that involves moral turpitude and had been sentenced to imprisonment for any such offence unless a period of five years has elapsed since his/her release.

What documents are required to start a chit fund?

While these companies are often thought to be illegal, this is rather untrue. This industry is completely regulated by the government, though these companies aren’t registered with the Reserve Bank of India.

However, no individual in India can start a chit fund business until she/he is registered with the chit registrar. Every district or city has a chit registrar, where one needs to go and apply for the chit fund registration. Nevertheless, before one goes there, one must register a private limited company in India under the Companies Act and then register apply for the license with chit registrar.

Documents for Starting a Chit Fund Company

Personal documents of the director
PAN Card details
ID proof (Voter ID card, passport, Aadhar card, driving license)
Address proof (Latest bank statement, electricity bill, mobile bill, telephone bill)
Passport size photograph

Registered office documents
Latest electricity bill
Rental agreement (in case the premises is rented) and an NOC from the landlord
Sale deed (in case the property is owned)


1. Who regulates this type of business?
They are governed by the Chit Funds Act, 1982. According to this Act, chit fund businesses can be registered and regulated only by the respective State Governments. The regulator of chit funds is the Registrar of Chits who is appointed by the respective state governments under Section 61 of Chit Funds Act.

2. Is its income taxable?
The dividends that are earned in a chit are not taxable. If one wants to claim the bid as loss then these dividends have to be shown as revenue income in the assessment. Therefore the entire dividend earned in a chit is not taxable if one doesn’t claim the bid amount as loss.

3. What is a chit fund company?
It is a sort of a savings scheme practiced in India. A chit fund company is a company that conducts, manages, or supervises such a chit fund.

A lawyer with 14 years' experience, Vikram has worked with several well-known corporate law firms before joining Vakilsearch.