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in Commercial Law
Asked July 28, 2017

Legality of Chit Fund Scheme

  • 1 Answer

One of the widely known chit fund scheme "Committee"(as commonly known in India) where people or group members use to create a money pool and monthly submits the money to host and bid takes place every month to take pool money with charge of some interest that will benefitted to all members. I know people are doing it illegally but my question is why is it illegally when friends are pooling their money together for the worst time or for some savings. Is it legal to provide them platform to host a group that'll help all members with all money issue & calculations and help them to bid while sitting at home. What are registrations required to do the same. Thanks

Answer 1

Both the centre and state can frame legislation regarding chit fundsStates like Tamil Nadu, Andhra Pradesh and Kerala had enacted legislation (e.g The Kerala Chitties Act, 1975 and The Tamil Nadu Chit Funds Act, 1961) for regulating chit funds.

The Chit Funds Act, came into existence in 1982, the Ministry of Finance enacted the Chit Funds Act to regulate the sector.  Under the Act, the central government can choose to notify the Act in different states on different dates; if the Act is notified in a state, then the state act would be repealed.  States are responsible for notifying rules and have the power to exempt certain chit funds from the provisions of the Act.

Under the Act, all chit funds require previous sanction from the state government.  The capital requirement for establishing chit funds is Rs 1 lakh and at least 10% of profits should be transferred to a reserve fund.  The amount of discount (i.e. the bid) is capped at 40% of the total chit fund value. States may appoint a Registrar who would be responsible for regulation, inspection and dispute settlement in the sector. Any grievances over decisions made by the Registrar can be subject to appeals directed to the state government. Chit fund managers are required to deposit the entire value of the chit fund (can be done in 50% cash and 50% bank guarantee) with the Registrar for the duration of the chit cycle.


The Prize Chits and Money Circulation Schemes (Banning) Act, 1978 defines and prohibits any illegal chit fund schemes (e.g. schemes where auction winners are not liable to future payments)


Thus, chit funds are considered legal only if registration is done either the Chit Funds Act, 1982 or under state specific legislation like The Kerala Chitties Act, 1975. Please check about the status of chit funds in your state and accordingly apply for registration in accordance with either the Chit Funds Act or under the state specific legislation.


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