Chit Fund refers to a transaction in which the Chit Fund company enters into an agreement with a specified number 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 or in such other manner as may be agreed upon, be entitled to the prize amount.
Registered chit funds are governed by the stringent provisions of the Chit Funds Act, 1982 and the money invested in these chits are very safe. The Chit Fund companies are required to keep an amount equivalent to 100% of the aggregate chit amount of all the chits conducted by them in fixed deposits with banks in the name of the Registrar of Chits for the entire duration of the chit.
The Chit fund company does not invest the amount collected by it anywhere as all the amounts collected every month are paid to the prized subscribers and no money is left with the company except the commission that they are entitled to towards their remuneration.
The prize money can be drawn any time from the second month onwards by participating in the auction. The prize money will be paid within 30 days after furnishing the required security and or sureties.
The Security and sureties are required in order to protect the interest of the non-prized subscribers. This will help in ensuring that the subscriptions are received regularly from the prized subscribers so that prompt payments could be made to the other subscribers also when they take the chit.
Chit fund companies do not deduct Income Tax at Source as they do not pay any interest or dividend to the Subscribers.