Written by : Rajiv Singh

A Chartered Accountant in UK with 15+ years of experience in FinTech Consulting, Accounting & International Taxation. I enjoy being a Social, Foodie and Father of two young children, reachable at linktr.ee/RajivSingh.

Nidhi Company - An Insight

Rajiv Singh
Rajiv Singh, CA, FAIA

Dec 15, 2021 16:59

Nidhi means treasure. In India, a Nidhi company represents the central government's initiative that was started to augment the savings of its members. It is regulated by Section 406 of the Indian Companies Act of 2013, the Companies Rules of 2014 and the Chapter XXVI of the Companies Rules 2014. The main feature of the Nidhi framework is that only its shareholders can benefit from it. Thus, it collects deposits and provides loans for the mutual benefit of its members.

There are numerous organisations that are attached to a Nidhi Company. Collectively, we can call them Benefit Funds, Mutual Benefit Funds, Nidhi, Permanent Funds or Mutual Benefit Companies. It is an establishment with at least seven members, and among these three will act as the director of the company. Because of its thrifting feature, it accumulated immense popularity in South India. Along with this, it centres around individual benefits, so it is subjected to certain tax exemptions. In this blog article, we shall take a deep dive into the key features and pivotal things you need to know about Nidhi Company.

Features of Nidhi Company

Nidhi belongs to a category of an NBFC (Non-Banking Finance Corporation). Even though it does not come directly under RBI, the reserve bank does intervene in its activities by issuing directives about deposits and financial handlings. The main features of such a type of company are mentioned as follows:

  • In a Nidhi Company, the aids are curbed to a specific group of people.
  • All fundings back you with standardised rates that help its members to utilise the money for construction activities or restoration of buildings. However, it is not as attractive as the loans from banks.
  • Nidhi Companies possess certain advantages despite the regulations under Company Act.
  • Stringent rules of a Central Committee restrict the usage of the word Nidhi around any ventures unless DCA recognises it. It is to prevent the illegal formation of groups imitating the government initiative. Consequently, incorporation of the word can lead to penal actions.
  • A Nidhi company cannot lease money, hire, purchase finance, insurance, or procure securities of an external company.
  • It will not acquire deposits or engage in any lending activity with an external company or an individual.
  • It does not have the authority to issue preference shares or any other debt instruments.
  • It cannot engage in any microfinance or vehicle funding activities.
  • The maximum interest rate on a savings deposit should not transcend the 2% of the rate provided by Nationalized Banks.
  • The company is empowered to acquire Fixed deposits, savings and RD. It can also optimise its profit with an interest of 12.5%.
  • The maximum threshold of NBFCs is not pertinent to Nidhi companies.
  • All the activities are regulated at a district level for the initial 3 years of incorporation. After that, it is free to have 3 offices within the district. If you need to expand the spatial boundaries, you need approval from the "Regulator Director".
  • One needs to submit securities for the purpose of issuing loans. It can be any tangible property like gold, land, FD, government securities or life insurance certificate.
  • It is obligatory to assure compliance with the annual filings, tax returns and audits.
  • You can start a company with an initial savings of Rs. 25,000.

Conditions for Nidhi Incorporation

  1. Nidhi should be formed as a 'public company'.
  2. The minimum threshold of equity share of the company is INR 5 lakhs.
  3. According to the terms and conditions, preference shares will get revoked on incorporation. Additionally, once the company is recognised, it cannot issue any more preference shares.
  4. The word "Limited" will be attached to the last part of its name. Hence it will be called "Nidhi Limited".

Clauses to meet after Nidhi Incorporation

  1. Within one year, Nidhi should have at least 200 members.
  2. The average funds hold of the company should be 10 lakhs or more
  3. Unencumbered term deposits of a minimum of 10% of the prevailing deposits.
  4. The ratio of the average retained capital to deposits should be more than 1:20.

Documents needed

Before starting the registration process, let's take a look at the documents that are necessary to complete Nidhi incorporation.

For this, you need;

  1. MOA – Memorandum of Association
  2. AOA – Article of Association
  3. DIN of directors
  4. Property documents / rent agreement / lease agreement
  5. NOC of owner/landlord
  6. PAN of members
  7. Address proof of members
  8. Identity proof

Steps involved in Nidhi registration process

  1. The company's directors can submit the application for DIN via E-From post to receive a digital signature certificate.
  2. Once you have acquired DIN, you can attach a name for the company under Nidhi. It should have the word "Nidhi" in it and need to be within the provision prescribed by the MCA. However, you do not need name approval from the DSC in accordance with the change in the rule of 2018.
  3. To verify your company, you can submit the documentation with E-Form to the authorities.

Once you complete the required verification, you will receive a certificate within 15-25 days, approving the Nidhi company. The certificate also comes with your Corporate Identity Number.

Nidhi registration fees

Online payment options are available for Nidhi registration, and the fee involves multiple sections. Hence, the fee changes depending on your authorised capital. Furthermore, an additional fee of Rs. 500 per director is necessary for completing the DIN registration. At the time of name approval, you will pay Rs. 1000 and you also need to pay for the state stamp duty.

Benefits of Nidhi Company

As this is a central government initiative, Nidhi company offers several benefits to its members. Unlike other banks, the company's liability is less as there is no risk of losing properties of directors in case of losses. Additionally, when compared to other NGO financial settings, Nidhi stands unique with credible solutions and a resilient structure. One of the crucial functions of the company is to amplify the savings of its members. Hence, the Nidhi platform offers an effective way of generating income and thrifting money. Moreover, access to public funds and the cheaper loan rate make it an attractive option for stakeholders. As the regulatory controls of RBI are limited, it facilitates customised loan services which are far more convenient than other lending services. Moreover, it proves as a safe and secure way of handling money. The closed network only allows stakeholders to benefit from this initiative.

Register a Nidhi Company with top-class support from Gotaxfile!

To conclude, we can confidently say that Nidhi is one of the best financial networks to receive loans easily and without hassles. This mutual benefit scheme will support local communities and encourage the savings of its members. However, complying with tax and registration can be arduous for a newcomer. This is where Gotaxfile can lend a hand! We can assist you with all the fundamentals of Nidhi incorporation and help you comply with the tax regulations. Contact us for faster incorporation and file your tax returns!

Rajiv Singh
Rajiv Singh, CA, FAIA

Dec 15, 2021 16:59

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