Let’s walk through one small chit using round numbers. These figures are only an illustration — the real terms of any chit are written in its agreement.
The set-up
- 20 members, each paying ₹5,000 a month
- The scheme runs for 20 months
- Chit value = 20 × ₹5,000 = ₹1,00,000
- The foreman’s commission is 5% of the chit value = ₹5,000 (this is the most the law normally allows, so check your chit’s rules)
Month 3: the auction
Ravi needs money now. At the monthly auction, he offers to take ₹85,000 instead of the full ₹1,00,000. The ₹15,000 difference is called the discount.
- Ravi receives ₹85,000 (the prize money).
- From the ₹15,000 discount, ₹5,000 goes to the foreman as commission.
- The remaining ₹10,000 is shared among all 20 members as dividend: ₹10,000 ÷ 20 = ₹500 each.
What each member pays that month
₹5,000 instalment − ₹500 dividend = ₹4,500. So the members who don’t take the pot that month effectively get a small discount on their payment.
What happens after you’ve taken the prize?
Once you’ve received the pot, you keep paying your full instalment every month until the chit ends, and you don’t receive dividends any more. Because of this, the member who waits until the end usually comes out ahead in pure numbers, while the member who bids early gets money when they need it most.
Key words in one place
- Chit value: the total pot for one month.
- Discount: the amount the winning bidder gives up.
- Dividend: each member’s share of that discount, after commission.
- Prize money: what the winning bidder actually receives.
This article is for general information only and isn’t financial or legal advice. Chit fund rules differ from state to state, so always check the requirements that apply where you live.