Chit is a mutually beneficial scheme where in a group of people contribute towards the chit value and one member from the group is given the prize amount and the dividends are distributed to all the other members. For Example if we consider a chit value of Rs.100000/- with 50 members in the group each member has to contribute Rs.2000/- where by (50 X 2000) Rs.100000/- is collected. The auction is conducted in which the members participate and the person who discounts the maximum is declared as the prized subscriber. If there are more than one participant for maximum discount the Successful Bidder will be determined by way of lottery. Where in, the tokens bearing the numbers allotted to the members is put into a box and one token is drawn by any of the member present in the auction and thus, the member whose number is mention on the drawn token will be declared as the Successful Bidder. 40% is the maximum bid allowed, which means a person foregoes Rs.40000/- and the balance Rs.60000/- is paid to the prized subscribers. Out of 40% discount 5% goes to the company towards company's commission for conducting the chit and balance of the discount amount is distributed equally amongst all members of the group. That is 35 % is distributed to all the members by which next month they have to contribute (Rs.2000/- - Rs.700/-) = Rs.1300/- only and Rs.700/- is declared as dividend for that month. When there are no maximum bidders, then the members will bid in the open auction and the person who bids the highest is declared as Successful Bidder. For Example: Suppose, in the 10th month the Successful Bidder was declared at 35%, then all members of the group will get a dividend of Rs.600/-each i.e. (Rs30000/-divided among 50 members) and each member has to pay Rs.1400/- towards Installment. Therefore the members have to pay the installment amount less the dividend, the dividends earned workout to be the interest on the Installment payments made by the member. Successful Bidder is supposed to give the required sureties depending on the future liability of the chit. Only Non-Prized Subscribers whose payments are up to date can participate in the auctions. Every month there is a Successful Bidder who gets his prized amount on submission of required Guarantors. The prized subscriber has to continue to pay the monthly installments till the termination of the chit. Those members who do not want to draw the chit can contribute to the chit and after the 40th month if there are no bidders for the auction, the auction is decided by lot among the Non Prized Subscribers and the Successful Bidder is paid the Prize Amount. They either have options to submit sureties or prefer Future liability deducted upon which balance amount is paid from the Prized amount. The dividend accrued for the 50 months are the returns on investment for the monthly deposit are made to their accounts.

Chit fund is a unique financial concept, which has flexibility to borrow or save. By paying one-month installment amount, a person can get to borrow from the chit value, by offering a discount not exceeding the maximum limit ascertained in the chit agreement. In a chit value of Rs.100000/- for a period of 50 months, first the subscriber can get an amount of 60000/-by paying only Rs.2000/- and remaining installments he pays over a period of 50 months. The rate of borrowing is much cheaper than several other financial schemes. The non prized subscriber who is a saving member upto the last installments gets dividend which is comparatively higher than the interest that are accrued by way of Recurring Deposit Schemes. The purpose of drawing the prized amount need not be disclosed. It can be used for any need by the member for Example: House construction, Marriage, Education, Expansion of business, buy a Computer or any other purpose at his discretion.

A person cannot take more than 2 (Two) chits in a group that too he should have paying capacity for the same.

A Registered Chit Fund Company makes a Security deposit equal to 100% of chit value in a Schedule Bank as FDR, which is pledged in favor of registrar of chits. Therefore, a member in a registered Chit Fund Company is very much secured than a member in a non-registered company.

Auctions are conducted in the branches where in the foremen declares the successful bidder. All non-prized subscribers who have paid their Installments up to date are eligible to participate in the auctions. In case the payment is made by cheque the cheque should have been realised one day before the auction date. It is upto the members to be present in the auction hall 10 minutes before auction time as verification has to be done by branch for signatures of members and identification of proxies and their Bid Authorization letters. During the first few months there will be more number of participants willing to bid at the maximum discount. This maximum discount is predetermined for each group and should not go beyond 40 % of Chit value. The maximum bid limit varies between 30% to 40% Out of which 5% of the chit value is the company's commission and the balance percentage is distributed as dividends equally among the members in the group. The member pays the next installment minus the dividend and the dividend amount is credited to his account. When there are more members for maximum discount their tokens are put in a box and one token is picked by way of lottery. The member who holds the ticket that is marked on the picked up token is declared as successful bidder who has to submit the required sureties depending on the Future Liability. When there are no maximum bid offers in the auction members can participate in open bidding during the auction time. When there are no maximum discount bidding members are supposed to participate in open bidding during auction time, which starts with a minimum 5% of chit value or any bid offer that has been given by a member prior to auction time. Members are supposed to bid in multiples of Rs.100/- from the minimum bid offer amount and the person who quotes the highest bid amount shall be declared the successful bidder by the foremen. If there are no offers above the bid offer the member who has given the highest amount as bid offer is declared as successful bidder. Bid offer is to be given to the office 24 hours prior to the day of auction in which one can mention the maximum bid amount that is acceptable to them. If a member is unable to participate in the auction the member can authorize some other person whose signatures has to be authenticated by the member. Generally member authorizes the family member or Development Officer's and Agents as proxies to participate in the auctions.

A member can participate in auction right from the first auction itself, only if he or she has made the payments up to date. If paid by cheque, it should be realized before the auction date. A defaulter whose payment is not upto date before auction is not eligible to participate in the auction.

There will be a compulsory saving which will earn dividends every month. Even if you take at the last month, the total dividends earned will be more than the bank interest rate.

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.