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© 2011-15. All rights reserved. Ethica Institute of Islamic Finance™ is a training, certification, and advisory company.

How to Calculate Zakah

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© 2011-15. All rights reserved. Ethica Institute of Islamic Finance™ is a training, certification, and advisory company.

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“Establish regularprayer and giveZakah”

(Quran 73:20 )

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The Importance Of Zakah

The Prophet Muhammad (Peace be upon him) said:

If someone is given wealth by Allah but does not payits Zakah, that wealth will appear to him on the Day ofJudgment in the form of a bald serpent with 2 horns,encircling him and squeezing him all day, then holdinghim by the lips and telling him, “I am your wealth, thetreasure which you hoarded”.

(Bukhari & Muslim)


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The Importance Of Zakah

• Zakah has an inner and an outer dimension

• Outwardly it purifies your wealth

• Inwardly it restrains inclinations such as greed,miserliness


What Is Zakah?

• Zakah is a Divine obligation

• It is the right of the poor over the rich

• Withholding Zakah is equivalent to depriving thepoor of their God-given right


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• “In their wealth there is aknown share for thebeggars and the destitute”(Quran 70:24-25)

• “Take alms from theirproperty that you maypurify and sanctify themand pray for them. Verilyyour prayers are a comfortfor them” (Quran 9:103)


What Is Nisab?

• Minimum amount of wealth upon which Zakah ispayable

• The financial floor above which an individual isconsidered ‘Sahib-in-Nisab’ and liable to pay Zakah

• The Nisab limit was set by the Prophet (Peace beupon him) at 20 Mithqal which is equivalent to:

• 87.48 grams of gold

• 612.36 grams of silver


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What Is Nisab?

• To determine current equivalent of the Nisab limit,one must establish market rate for a gram of goldand silver

• Zakah payable if:

Zakatable assets+ (Debts owed to one)− (Debts owed by one)

=> Nisab


What Is Nisab?

• Zakah is payable at a rate of 2.5% on all assets

• Let’s say the Nisab is $600

• Example 1

• Hamid’s Zakatable assets are valued at $10,000

• He owes $7,500 to a friend

• His Zakatable assets are $10,000 - $7,500 = $2,500

• Hamid’s Zakah liability is 2.5% of 2,500 = $62.5


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What Is Nisab?

• Example 2

• Jamal’s Zakatable assets are valued at $3,000

• Jamal owes $2,500 to various people

• His Zakatable assets are $3,000 - $2,500 = $500

• Jamal’s Zakatable assets are below the Nisab level,he is not liable to pay Zakah


Who Pays Zakah?

• Sane adult

• Muslim

• Possessor of wealth

• Sahib-in-Nisab


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Who Is Not Eligible To Receive Zakah?

• A descendant of the Prophet’s family (Peace be uponhim)

• The payer’s:

• Spouse

• Father or grandfather

• Son or grandson


Who is Entitled To Receive Zakah?

• The poor and destitute

• People whose total assets, excluding assets for basicnecessities, after deducting outstanding basic livingexpenses and debts are less than the Nisab level

• Relatives should be preferred over the general public


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Assets Subject To Zakah

• Personal Assets

• All assets for personal use are exempt from Zakahexcept cash, gold and silver

• Trading Assets

• Zakah is liable on all assets purchased for resale

• Zakah is not liable on assets purchased to earnrent, investment return


Assets Subject To Zakah

• Zakah is paid on the balance of assets owned on theZakatable date

• Zakah is not payable on impermissible income

• Entire value of impermissible income must begiven away to charity


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Six Categories Of Assets Subject To Zakah

1. Gold and silver

2. Cash and liquid investments

3. Business assets

4. Livestock

5. Agricultural output

6. Mineral Ore


1. Gold And Silver

• Subject to Zakah in all forms, whether owned forpersonal use or trade


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2. Cash And Liquid Investments

• Cash at bank

• Cash in-hand

• Any form of investment that can be easilyliquidated excluding equity based investments


3. Business Assets

I. Property and other fixed assets

• Zakah treatment is based on the following purchaseintentions:

i. Intention to retain ownership of asset

ii. Intention to reside in property

iii. Intention to resell asset

iv. No intention


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Intention To Retain Ownership Of Asset

• Not subject to Zakah (e.g. investment property)

• Any profit received from rent is subject to Zakah


Intention To Reside In Property

• If property is used entirely as residence it is exemptfrom Zakah


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Intention To Resell Asset

• If purchased with the intention to resell for profit itrepresents stock in trade

• Entire value of property is subject to Zakah


No Intention

• If there is no clear intention for purchasing anasset Zakah is not payable on it

• Any profit received as rent is subject to Zakah


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3. Business Assets

II. Raw material, Work-in-progress, Finished goods

• Subject to Zakah as they are purchased with theintention to resell


3. Business Assets

III. Shares / Equity Investments / Trusts

• If purchased with intention to resell, they aresubject to Zakah

• If purchased as investment to generate returns,Zakah is due only on Zakatable assets


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When Is Zakah Paid?

• Zakah is payable on assets held for one lunar year

• Zakah year starts when a person first becomesSahib-in-Nisab


Zakah Date Considerations

1. Date when individual first becomes Sahib-in-Nisab

2. Wealth fluctuation during the year

3. Date of distribution


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Date When Individual First BecomesSahib-in-Nisab

• Zakah year begins on the date an individual’s wealthfirst equals Nisab

• Zakah liability is calculated from same date every year

• If an individual does not recollect this date, he canmake an estimate

• The beginning of Zakah year may be set inRamadan


Wealth Fluctuation During The Year

• In case wealth fluctuates during the year, Zakah isdue only if it equals or exceeds Nisab at the end ofthe year


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Date Of Distribution

• Zakah should be distributed exactly one year afteran individual becomes Sahib-in-Nisab


How To Pay Zakah?

You must:

• Identify the date you became Sahib-in-Nisab

• Determine market value of Zakatable assets onZakatable date

• Add debts owed to you, subtract debts owed toothers from value of Zakatable assets

• Pay Zakah at 2.5% of Zakatable assets value


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Validity Of Zakah

• Zakah is valid if:

• Zakah payer makes a clear intention upon payment

• Recipient meets Zakah eligibility criteria

• Recipient receives ownership of assets given tohim as Zakah


Missed Zakah

• Zakah payments missed in previous years due toignorance or negligence must be calculated and paid


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Zakah And Debts

• These include:

1. Debts owed to oneself

2. Debts owed to others


Debts Owed To Oneself

• Debts owed to oneself are subject to Zakah

• The following debts are included in Zakahcalculation before they are received:

• Debts owed to one on account of goods sold

• Personal loans

• All pension schemes except for state pensionschemes


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Debts Owed To Oneself

• The following debts are included in Zakahcalculation after they are received:

• Inheritance

• Salaries

• Pensions

• Dowry owed to wife


Now Let’s Look At Pensions

Where pension benefits have not been received:

• If payment made to pension policy is compulsory,deducted from salary at source and isn’t invested, it isnot subject to Zakah

• Zakah is due on all forms of pensions that are invested

• When not invested, pension holders should determinevalue of their contribution as it is subject to Zakah


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Debts Owed To Others

• Generally, all debts payable are deductible fromZakatable assets

• Debts payable include:

• Basic living expenses payable

• Debt owed against goods purchased on credit

• Installment-based debt

• Personal, commercial loans

• Taxes

• Dowry owed to wife


Debts Owed To Others – Installment-Based

Classified into 2 categories:

• Mu’ajjal: Debt for which immediate payment is due

• Deducted from Zakatable assets

• Muajjal: Debt paid in installments

• Future payments for next 12 months deductedfrom Zakatable assets


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Debts Owed To Others – Taxes

• Money paid as general tax cannot be offset againstZakah

• Money payable as tax can be deducted fromZakatable assets


Questions& Answers

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