Global عربي
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Global عربي
Zakat is a form of obligatory charity one must perform, and is one of the five pillars of Islam. Its importance is highlighted by the numerous mentions in the Quran alongside salah (prayer).
Allah mentions,” Establish prayer, pay alms tax, and bow down with those who bow.” (Surah Baqarah).
It is mentioned in Al-Tirmizi, “When you pay the Zakat you have fulfilled what is required of you.”
The word ‘zakat; is derived from the word Zakd, which means to grow. Another meaning is of purification, as mentioned in the Quran, “Successful indeed are those who purify themselves.” (Surah Al-A’laa).
AAOIFI defines Zakat as the right which becomes due in certain types of wealth and disbursable to specific categories of recipients.
The act of Zakat is a reminder for all muslims that ultimate ownership belongs to the creator. It is used to minimize the poverty that exists in a society and it purifies the wealth and soul of the one who pays it .
Allah mentioned, “Take charity from their wealth in order to purify and sanctify them.”
(Al-Taubah 9:103).
There are several conditions for paying zakat. Only those who fall under these conditions are obligated to pay.
1-The payer must be muslim.
2-The payer must be free ( he is not a slave)
3-The payer must have full ownership/ possession of the wealth.
4-The wealth is above the nisab (minimum rate)
5-The wealth meets the full hawl (the wealth is kept for a full year while being above the nisab).
6-Hawl is defined as a completion period of 354 days.
There are three primary rules when it comes to zakat on wealth.
1- The first rule is that before one can pay Zakat their wealth must reach a specific threshold. This is what is called the Nisab.
The Nisab is defined as a minimum zakatable amount of zakatable wealth. The nisab is either calculated in terms of the wealth equivalent to either gold, in which the nisab is 85 gm of gold, or it is calculated with equivalence to silver which is 595 gm. This is also the case of currencies and liquid investments.
2- The second rule is related to the holding period, also known as hawl.The hawl is counted after the wealth reaches nisab, and is only counted as long as the nisab is complete.
If the wealth falls under the rate of nisab , then the hawl is valid. Some assets are exempted from this hawl, such as agriculture.
3- The final rule relates to the zakat rate, meaning how much of zakat is eligible on all assets. The general rate of zakat is 2.5% of all assets is deductible.
Although various asset groups have various rates. For example, on money and articles of trade its 2.5%, on agriculture produce and fruits, its 5% if irrigated, and 10% if rain fed (Al-Masri).
Zakat on shares is an obligation on each share holder individually. Although the company can pay on the behalf of the shareholders, if certain conditions are met, like the shareholder authorizing the company to zakat on his behalf etc (IIFC 1998)
Zakat in mutual funds is dependent on the makeup of the fund itself. If it consists of equities then it shall be zakable according to the zakat of equities.
If it consists of other asset classes, i.i. Sukuk and commodities, then it will be zakatable according to the class.
A Sukuk is a shariah compliant financial instrument which is equivalent to a conventional interest based bond. Zakat on Sukuk investment is determined by the underlying asset. If the asset is Zakatable itself then zakat will be paid on the Sukuk (National Zakat Foundation, 2021).
There are three scenarios to this type of property.
Firstly, if it is bought with the intention of resell, then zakat is payable. Secondly, if it has been purchased as a long term investment , with no intention of selling, then zakat is not applicable.
Finally, if it is a property that is leased, then zakat is due on the rental income rather than the value of the asset (Zakat made easy)
Read more about: Is Fractional Ownership Investment Halal & Shariah-Compliant?
Gold and silver are considered natural forms of money. The Islamic schools of thought all treat gold and silver differently.
The hanafis consider all forms of gold and silver to be zakable. According to the Malaikis, Shafis and Hanbalis however, only gold and silver that is used as trade stock or a form of investment are zaktable. Everyday worn gold and silver is exempted.
Commodities are complicated due to products like futures and CFDs. These products are not Shariah compliant.
In this case, if the contract is Invalid (Batil), due to there being no subject matter in the sale contract, then the transaction is invalid.
Zakat will then be payable on the premium paid by the trader if they receive it back. If they don't, then zakat is not payable.
Read more about: What Is Commodity Riba - What Are The 6 Ribawi Items?
Crypto assets refers to all coins and tokens that fall under the digital asset brand. Different types have different rulings in the Shariah.
Coins like Bitcoin, Ethereum will always be Zakable at 100% of their current holding value regardless of the intention. Security tokens, if purchased to resell will be Zakatable 100 %, if they are purchased for long-term investments,
the zakat will depend on the underlying assets of the company. Asset-backed tokens are similar to security tokens, depending on the investment strategy they either will be 100 % zakatble or it will depend on the Zakatable asset.
Finally, governance token will be Zakatble if intention is to resell, otherwise they will not be Zakatable (Faraz Adam)
Read more about: Is Bitcoin Halal? Islamic view of bitcoin ownership as a digital asset
Zakat in these types of accounts must be paid from the investment balance as well as the profits. This is regardless of short term or long term investments.
The zakable shall be paid regardless on whether is is a restriction from the institution or not (AAOIFI)
To calculate Zakat on stocks, there are 2 methods. If you plan on investing for the short term, then it's simple.
You will treat the entire value of your investment in the same way you treat cash, and pay 2.5% on the total investment value at the time of paying zakat.
If the intent is long term holding, then your assets will be the liquid assets the company holds.
Here are the steps:
1-Check the balance sheet of the company you have invested in.
2-Add up all the liquid assets in the current and non-current assets
3-Work out the total market capitalization of the company.
4-Now divide the total liquid assets by the market capitalization. This will give you a percentage.
5-Apply this to your total investment value.
6-Finally, you pay 2.5% of what is left (IFG)
Zakat on Mutual Funds and EFTs is different from that to individual stocks. Therefore the method is different as well. The way to calculate is to simply take 25% of the value of your investment in the fund and pay 2.5% zakat on it (IFG)
As mentioned before, if the purpose of buying the property is to resell it then the entire property will be subject to zakat. Which is 2.5%
However if the intent is to benefit from the rental, then the zakat will be deducted after all expenses. For example, you own a property with a rental of 1000 USD.
After costs (mortgage and others) the rental left is 500 USD, then you will pay on the remaining 500 USD only.
Zakat on Sukuk, would depend on what type of structure it is. For example, the calculation of Sukuk Al-Ijarah shall be applicable to the rental income that has been paid.
In Sukuk Al-Musharakah, zakat will only apply to the portion of the ownership in the underlying asset.
As for Bonds and other fixed income products, due to the nature of the product, the holdings should be liquidated. However the Zakat is payable on the principal amount of the bon, whereas the interest amount should be disposed to charitable avenues.
Yes, dividends are most certainly Zakatable.The dividends can be calculated separately whenever they are received. And you just take 2.5% of the entire dividend.
Most employers offer pension plans to their employees, in which they invest a certain portion of their salary to the fund, which is receivable at retirement.
If you and your employers both contribute to the funds.In these types you take 25% of the value of the pension and pay 2.5% on it.
This is in the case that the pension is invested in equity funds. In the case of individual stocks, they are treated as liquid assets, you apply the 25% method, where you take 25% of the companies assets and deduct 2.5% for zakat.
Read more about: What Are Pension Funds & How They Work?
In private retirement funds, the zakat you pay is dependent on what assets you have invested in your fund. The same approach will apply as the government/employer fund, take 25% of the fund and pay 2.5% on it.
There are many asset types and funds which are on-hand accessible and some which are not. The general rule for these funds is that accessible funds are zakatable if they reach the nisab.
This includes cash savings, investment like stocks and mutual funds if held for trade or investment.
As for locked funds like pensions, as mentioned if you cannot access them then they are not payable before receiving them. Fixed deposits are zakatable due to the underlying assets that have been invested in.
Al-Quran 2:43, 9:103, 87:14-19
Al-Tirmizi, 618
AAOIFI, Shariah Standard 35, “Zakat”
Al-Masri, Islamic Jurisprudence of Financial transactions.
IFG, Zakat on EFTs
IIFC Resolutions 120, (2001)
Zakat on Sukuk, National Zakat Foundation, 2021
Zakat Made Easy, Mufti Faraz Ahmed, 2022
Disclamer:
This post is for educational purposes only, and does not constitute investment advice or a solicitation to take any financial action. It should not be relied upon when making investment or financing decisions.
