SAMMILANA

Frequently Asked Questions

What are Chit Funds?

Chit Funds are widely acclaimed financial system.Here every member of group is allotted a ticket (chit) and hence,it is called Chit Fund.The trustee of the chit fund is called as Foreman.The chit fund scheme transforms the small savings into major pool and strengthens many unorganized savings into capital.
How did they originate?

Chit fund trace their origins to Southern India.There, the farmers started small groups for making joint pools of grains with a trustee who used to collect a fixed quantity of grains and substitute every month to members of pool according to need. This worked for the benefit of all the members and the tustee would also get a small share for his services every month.This concept of mutuality became popular and slowly money took place of the grains.
How do they work?

Chit funds are created out of pooled periodic investments by group of persons. The members subscribing to the chits have to contribute an installment based on value of the chit. The installments to be deposited are already pre-calculated. This procedure resembles somewhat that of recurring deposits in a bank.
How is a chit fund a better saving option, when compared to a deposit in a bank, Mutual fund etc.?

By joining a chit fund, a person is forced to save a small part of his income, to meet his Planned / unplanned investment/ expenditure. Incase of a contingency, borrowing from the chit fund (prized money) is much easier, simpler faster and cheaper than borrowing from a bank. The chit loss is normally lower than the market rate of interest. In case a person wants to save till the last, the returns a subscriber gets by way of chit dividends is much higher than interest from banks on recurring deposits.
What are the benefits?

Persons who want to save money and receive the prized/bid amount in the second half of the chit period, earn very much higher return (12% to 18% per year) than their periodic savings kept with a bank.
Those in need of money are able to raise money by receiving the prized/bid amount when they are in need of money. The interest/chit loss in such cases is very much less than the market rates.
All persons joining a chit group are forced to save a small amount of their income to finance their dream projects such as – purchasing a plot or building a house or meeting marriage expenses or buying domestic articles, or discharging an existing liability etc.
Each person who pays his periodic installments upto date is entitled to receive the prize/bid amount at a period of his choice for meeting contingencies, after participating in a lottery auction.
What are the Income Tax benefits from saving or borrowing?

The dividends earned in a chit are not taxable. If you want to claim the bid as loss then these dividends has to be shown as revenue income in the assessment. Hence the entire dividend earned in a chit is not taxable if you don't claim the bid amount as loss.
What are the benefits of receiving chit amount in the first few months, at a discount or loss?

Since the successful bidder, in the initial few months is allowed to use the chit amount, for his personal use ahead of others, he offers to take the chit amount at a discount, after calculating interest and cost of funds. It may be noted that a successful bidder withdraws more money from the company, than he had already paid, and repays the excess amount withdrawn, in periodic installments until completion of the chit period. The excess amount so paid is known as chit loss.
What is auction discount?

The difference between chit value and the amount at which a successful bidder takes a chit in a lottery auction is known as auction discount.
What is an auction?

Auction is a procedure for identification of the non-prized subscriber who wants to take a chit amount at the highest permissible discount. All non-prized subscribers who have paid their installments upto date are allowed to participate in the auction for bidding the highest auction discount, within a period of five minutes, allowed for each auction.
What is chit dividend?

Auction discount minus company commission (5% of chit value) is the total group dividend. Total group dividend is distributed equally amongst all the subscribers. The dividend so distributed is deducted from the next installment payable by the subscriber.
What is a lot?

When more than one non-prized subscriber wants to take the chit amount at the same discount or the maximum allowable discount, the chit numbers (coins) of all such non-prized subscribers are put in a container and the successful bidder is identified by removing one coin from the said container. This procedure is known as a lot.
What is "coming to open"?

When there is no member in the chit group who is willing to receive the prized/bid amount at the maximum allowable discount, the bidding for the chit comes in for open auction. This is known as "coming to open".
How many sureties or guarantors are required?

Normally for all chits a minimum of three sureties/guarantors (other than family members) are insisted upon. The basic salary or taxable income of all such sureties/guarantors should not be less than 20% of the chits future liability.
What are the sureties to be submitted?
A member can give sureties depending on the future liability of the chit. Following are the sureties generally submitted by the members.
- Personal Surety: Any salaried person working in State/Central Govt./ Public Limited Companies/Banks and other Reputed Companies will be taken as surety.
- Pledge: Deposits with the company in chits or otherwise, net paid amount of which, after deducting foreman's commission should not be less than 1 1/3rd of the successful bidder's liability to the company.
- Bank Guarantee: Guarantee given by the Schedule Bank in a schedule format can be submitted as surety.
- Income Tax Assessor: Any person having I T Assessment for the past three years having business, profession etc will be taken as sureties.
- Property Pledge: Deposit of title deeds of urban property can be submitted as surety. Third party property can also be given as surety.
WWhat are the benefits to the Foreman/chit fund company?

The foreman/chit fund company charges 5% of the chit value as commission/service charges – for the services rendered by it – like gathering a group of persons to form a chit group, collecting money from each such subscriber every month, arranging payment of prized money to one person each month, collecting money from the prized subscribers etc.
Why sureties or guarantors are taken?

A chit fund company undertakes to collect periodic installments from all the subscribers and pay the amount so collected, after deducting its commission (5% of the chit value) to one of the non-prized subscriber each month. At every point of time, the chit fund company pays the prized subscriber more money, than what it had collected from the said prized subscriber, on the understanding that the prized subscriber will pay the balance future installment on time. In other words, the prized subscriber takes a loan/advance from the chit fund company, with an understanding to re-pay the balance future installments in time, to enable the foreman/chit fund company to pay the prized money to other non-prized subscribers each month. In order to safe guard the interest of all non-prized subscribers, foreman/chit Fund Company insists upon the prized subscriber to provide guarantee/sureties for repayment of future installments.
What action will be taken against defaulting subscribers?

In case a non-prized subscriber defaults for a continuous period of three months, such subscriber will be removed. The actual amount paid by him in the chit minus Penalty is collected from all subscribers who make delayed payment of periodic company omission (5% of the chit value) will be repaid to such defaulting subscriber, after the completion of the chit period. In case a prized subscriber, defaults for a continuous period of three months, penalty at 6% per month will be collected and dividends will also not be paid to such defaulting prized subscriber.Legal action will be initiated against the said defaulting prized subscriber and his guarantors/sureties in a court of law, for recovery of all dues.
Can I withdraw from a chit group after becoming a member?

When a subscriber withdraws, the foreman/chit fund company has to find an alternate subscriber in his place. Until then the foreman/chit fund company has to arrange funds on behalf of such a defaulting subscriber, for payment to a prized subscriber each month. Hence withdrawal is permitted, but the actual paid by the subscriber in the chit minus company commission (5% of the chit value) will be repaid to such a defaulting subscriber, at the end of the chit period.
How soon can I expect the payment once I bid the chit?

Once a member is declared successful bidder it is his responsibility to provide satisfactory sureties/guarantors based on the future liability as specified in the byelaws. On receipt of the surety form the Branch forwards it to Corporate Office for Guarantor search. The liability of the member and guarantors are verified and then if the guarantors are acceptable it is sent back to the Branch for Documentation. The Branch has to prepare the document that mainly includes the guarantor bond and pro-note apart from the other requirements depending on the kind of sureties submitted.
Once the documentation and verification is complete, the document is forwarded to CO, which scrutinizes the document in all aspects, and if the document is found to be satisfactory payment is released with in 2 days.
In most of the cases the entire transactions are completed within 10 days very much depending on the kind of sureties and the document produced by the member. Members who make regular payments and those who submit the required documents immediately will have the greatest opportunity to receive the fastest payment.