d) The formalities to open Chit Fund Accounts are very simple. Chit companies do not require much documentation, which is one of the advantages over banks and other financial institutions. Some of the companies, however, ask for income proof and address proof from new member but most of the cases this is not a mandatory requirement. No business or address verification is undertaken by the chit funds unless it is felt absolutely necessary. In short the KYC (Know Your Customer) requirements are not presently applicable for Chit companies. Most chit companies admit only members who are either connected to other existing chit members or known to the foremen personally.
e) Most of the chit businesses are happening in the unorganized sector without proper registration or approval, so the income from these businesses is out of the scope of Income Tax or any other applicable taxes. As a result the actual return generated from chitty business is more attractive than bank deposits or other investments where the tax is deducted at source or the depositor is liable to disclose the income in his/here tax returns.
Use of the Chit Price Money
When you wanted to take a loan from a bank you need to specify the purpose and provide necessary proof required by them, chit fund do not require the members to state the purpose to which they wanted to use the funds, it is at their liberty to use this money for the marriage of their children, buying TV, Fridge, land and residential properties, utilize for children education, buying vehicles, meeting medical expenses, settling loans which were taken from the money lenders at higher rates etc. Small traders and businessmen subscribe largely in chit funds. Chit funds provide an opportunity for them to save their excess cash on a daily or monthly basis and, at the same time, to have access to easy finance in case of emergency or other requirement. Banks are hesitating to provide financial assistance to individual businessmen or small entrepreneurs due to non-transparency in their operations and lack of proper record keeping. These businessmen are highly exploited by the local money lenders charging exorbitant rate of interest for the money borrowed. Chit funds to a certain extant helps these small scale entrepreneurs to overcome their financial problems.
Chit Fund business in Kerala is governs by Kerala Chitties Act, 1975. The Kerala Cities Act was subsequently amended to include a provision which stipulates that companies can float chit schemes only amounting to 50% of the foreman's asset, whereas in other states that adopt the Central Act, companies are allowed to float chit schemes up to ten times the foreman's assets. The Kerala Act also imposes other stringent rules that have resulted in many companies registering themselves outside the state (primarily in Jammu and Kashmir where the Central Act does not apply). One should also note that in states which do not enact a State Chit Fund Act, the Central Act will automatically prevail.
A word of caution
Of late some crooked elements got involved in to this business and polluted it to the extreme. Some promoters disappeared with members' money, and in other cases some members disappeared after accepting the money. You have to be very careful while selecting the chitty company. You can find chitty companies everywhere. When you deal with chitty companies, go for those companies promoted by reliable persons with sound track records and proper and valid registration form the concerned Government authorities. Don't put your hard earned money based on their well-decorated offices or some attractive TV advertisements of film stars or other celebrities offering valuable gifts like luxury cars, luxury villas, foreign trips, gold coins, etc. . People subscribe the chit fund with a hope of extraordinary return within a specified period. It is true that people have received the promised amount in certain cases. However, number of allegations relating to loss of money of the investors is also alarming and growing in numbers, people don't have forgotten the recent chitty scam related to Himalaya and Everest Chit Funds. Also please note that Chitti is not a lucrative investment, if you fails to receive the money within a specified period of time, if you prolong to take your money back naturally your return will gradually come down.
So be careful when you select a Chitty Company. If you are keen to join chitty, better go for Government sponsored Chitty Companies like KSFC … etc.
Don't forget to mail your valuable suggestions and criticism to Prakash@yourownadviser.com Best Regards
Prakash Nair
