how to calculate zakah

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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

Lets say the Nisab is $600

Example 1

Hamids Zakatable assets are valued at $10,000

He owes $7,500 to a friend

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

Hamids Zakah liability is 2.5% of 2,500 = $62.5


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What Is Nisab?

Example 2

Jamals Zakatable assets are valued at $3,000

Jamal owes $2,500 to various people

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

Jamals 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 Prophets family (Peace be uponhim)

The payers:

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 individuals wealth

first 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 Lets Look At Pensions

Where pension benefits have not been received:

If payment made to pension policy is compulsory,deducted from salary at source and isnt 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:

Muajjal: 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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Documents

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