zakatonomics ebook may 2013

5/20/2018 Zakatonomics eBook May 2013

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Zakatonomics

the DivineEconomic

System

Understanding AlmightyCreators Master-Stroke in

Economics & FinancialManagement

Arif Jameel

Published by FastPencil


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Copyright 2013 Arif Jameel

Published by FastPencil

307 Orchard City Drive

Suite 210

Campbell CA 95008 USA

[email protected]

(408) 540-7571

(408) 540-7572 (Fax)

http://www.fastpencil.com

Since this book is based upon various communication between the author and his research and readings, it is highly possible that during thecourse of answering some of the queries, one may have taken some sentences and references verbatim from similar or related responses.

The Author is a student of Islam and does not claim to be a scholar or master of any sorts in this subject. The views expressed are purely

from a logical standpoint, and based upon reason and research, which may or may not appease certain readers.

Also this book is not meant to be about any specific sect or religious thought, but is based upon most common and consential views of the

Scholars at large.

This book is a living document touching upon the basics of Zakat and wealth distribution system. There are no specific royalties or copy-

rights on this material. You may freely distribute the contents once you have informed the author of your intentions.

The Publisher makes no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi-

cally disclaim any implied warranties of merchantability or fitness for a particular purpose. Neither the publisher nor author shall be liablefor any loss of profit or any commercial damages.

Printed in the United States of America.

First Edition


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To the Almighty Lord, whom we call Allah


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Acknowledgments

I thank Allah Almighty for making me what I am today, and

my parents for enabling me to be worthy of understanding the

purpose of life, and guiding us through the tender years.

To my family and kids for their unstinting support in letting

me go about this work, without much ado.

To all the brothers and sisters who over the years have writtento me with their various queries on Zakat, which has helped me

look into uncharted areas, which otherwise would have been

overlooked. Special thanks to Brother Burhan of Islamhel-

pline.com, for the excellent and simplistic replies to various

queries, which I have used as the basis for some of my examples.


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ContentsChapter 1 Zakat - The Islamic mandate on wealth distribution . . . . . . . . . . . . . . . . . 1Chapter 2 Concept of Wealth in Islam ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Chapter 3 Concept & Principles of Buying and Selling in Islam . . . . . . . . . . . . . . . . 7

Chapter 4 Is Zakat a Charity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Chapter 5 Zakat-ul-Maal and Zakat-Ul-Fitr .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 15

Chapter 6 Nisaab - The measure of Wealth .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 19

Chapter 7 Who is Eligible to Receive Zakat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Chapter 8 Difference between TAX and Zakat . .. . .. .. .. . .. . .. . .. . .. . .. . .. .. .. . . 27Chapter 9 Should Zakat be paid on Previously paid wealth? . . . . . . . . . . . . . . . . . . . 31

Chapter 10 Zakat on 401K, Provident Fund & Gratuity . . . . . . . . . . . . . . . . . . . . . . . . . 33

Chapter 11 Zakat on House Mortgages and Car Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Chapter 12 Zakat on Property Investments .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 39

Chapter 13 Zakat on Loans given to Friends .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. . 41

Chapter 14 Who Should pay Zakat on Wifes Gold Ornaments . . . . . . . . . . . . . . . . 43

Chapter 15 The Calculations of Zakat .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45


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1Zakat - The Islamic mandate

on wealth distribution

The word Zakat (zakaah)is an Arabic word and by defini-

tion it stands for Purification. In a broader canvas themeaning encompasses the process and means of attainingpurification. In our real lives, this relates to both individualand collective purification of our wealth, by sharing a smallportion of it with the poor, needy and destitute sections ofthe society.

Significance of Zakat

Zakat is the core of the foundation of a beautiful and balanced

Economic system ordained by our Creator for eradicating pov-

erty, redistributing wealth and controlling our greed for wealth.

It helps in the circulation of economic wealth, which in turn

feeds the poor, and builds upon social relationships, instillingthe humane values of caring and sharing, thereby building a har-

monious, inclusive society as it nucleus.

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Islam has a much broader canvas than the traditional defini-

tion of religion. It encompasses and lays out clear policies, pro-cesses, procedures and guidelines for every activity in our lives.

The Holy Quran, is not just a book of religious code and wor-

ship (theology), but a complete guide to the way of life. Its a

manual for humanity and provides a system of values related to

every aspect of individual and public life. The Quran, has direc-

tives and narratives on Theology, History, Astronomy, Eco-nomics, Sociology, Sciences, Governance, Law, Medicine, etc.

In short it encompasses the complete way of life, from cradle to

grave.

In this book we will consider the socio-economic impact of

Zakat, which forms one of the five fundamental pillars of Islam.

It will help us to understand how the economic system allows

for distribution and the flow of wealth between various sections

of the society. Zakat is a highly practical and scientifically

derived system and its beauty is that it does not cause any

burden on the payer, unlike the Taxation system prevalent

today. Its not akin to tax, but a simple sharing system, ordained

only upon the wealthy, to contribute a small, insignificant por-

tion of their accumulated wealth (about 2.5%), within the rela-tives, neighbourhood and members of the society who are eco-

nomically less-fortunate.

Why this burden of Taxation?

Zakat is not burdonesome on any individual, since its not

based on income, rather than on accumulated, unutilizedwealth! This is the divine science on which Zakat is based. This

small percentage helps the flow of funds from the haves to the

have-nots in the family and society. It helps in continued stimu-

2 Zakatonomics the Divine Economic System


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lation of social well-being and helps each one of us to instigate

our humanitarian element, by relating to the sufferings andhardships among the society. It also helps in eradication of con-

centration of wealth, which is the biggest problem that the capi-

talist, corporate world is facing today. It reduces our greed

factor and inculcates the art of giving from what we own,

thereby bringing us closer to each other and empathizing with

the poor and destitutes, the have-nots and the less-privileged.The mere act of giving also adds to the basic fulfilment of our

soul, helps us lead happier, fulfilling and sensible lives - at the

same time it spreads betterness amongst our families and com-

munities and societies, at large. The western materialistic world

inculcates a culture of greed, self-centeredness and focus on

individual. Islam advocates community building, rather than

individual building. It instigates us how to think in terms of

We rather than Me, Us rather than I, Our rather than

Mine.

Modern-day Slavery

In this world of corporate greed, the fruits and dignity of

labour are not justifiably spread. The gulf between the workersand a handful of corporate executives is so wide, that it builds

resentment, anger and hatred. The rich keep getting richer at a

much higher rate, and rest get poorer and deteriorate, by each

passing day. In addition the free market and capitalist societies

build up of a state of illusion, where human beings are all meas-

ured on the amount of wealth they have ammassed and thematerial objects-of-desire, they possess. This degeneration

leads to sanctifying and legalizing of all forms of Riba and

Usury, which is the main cause of the downfall of the economies

Zakat - The Islamic mandate on wealth 3


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the world over. Islam for this very reason, strictly condemns

Riba in all its forms, including Banking Interest. If we lookaround us in the developed worlds, the vast majority of the pop-

ulace are drowned in debts, which they would only be able to

pay off by continuing to work and toil for the rest of their lives.

This amounts to modern day slavery - A slave of the Banking

and Financial system, for life.

Purification and Insurance.

Other than the obvious social and economic benefits, Zakat

also purifies and insures our wealth. Who other than the

Almighty Lord, Allah, would be a better insurer! Its his promise

that any wealth on which Zakat is diligently paid for will remain

safe and secure and will not come in harms way and perish.

The earth does not have permission to swallow, neither does

the fire have the sanctity to burn, nor the water to drown, any

wealth on which zakat has been duly paid. Can we find a more

simpler, more beautiful and better system which offers, protec-

tion, insurance, spread and distribution of wealth in this world?

The answer is obvious, because we have taken to other forms of

remedies which are not divine and are bound to be flawed. Onlythe system ordained by the Almighty Allah can be divine and

flawless. Its timeless and Perfect.



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2Concept of Wealth in Islam

Wealth and wordly possessions in Islam, are considered as agift from Allah, our creator and cherisher. We are tempo-rary custodians of this wealth. We are entrusted in what-ever we have received and gained, and our role is limited toa Managing Trustee. We have been born without owninganything. Allah has gradually granted us with several meansof livelihood and economic wealth. We have often heardthe saying Al Mulku Lillah - which means that the totalownership of everthing we possess, belongs to Allah. He isthe supreme and total Owner. We are guided to act inaccordance to His divine laws and ordainments. Allah hasprovided clearly defined Divine codes of practice on how toobtain wealth, how to administer that wealth, where tospend and how to promote it for social and public benefit. This is a fundamental viewpoint of Muslims and Islam,

which is a very important paradigm differentiator betweenthe common worldly understanding of wealth, and how

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Islam deals with its - ownership, acquisition, distribution

and accountability.Once we understand and digest the fact that we are not the

actual owners of the wealth we possess, it becomes very easy for

us to follow the divine instructions laid down by Allah, on how

we acquire wealth, how we administer it, and how we spend it.

This also diminishes the element of greed that we see all around

us in this world. We are responsible for our sources of income,and also our spending, within the marked guidelines of the

divine laws ordained by Allah also known as Sharia.

The hadith below foretells that on the day of judgement a

person will not move from his place unless he answers the fol-

lowing questions.

A slave will not be able to take a step further on the Day ofRequital until he is taken to account for the following things: his

time and how he spent it, his knowledge and how he used it, his

money and how he earned and spent it, and his youth and how he

passed it. (Tirmidhi)

Wealth owned must also be spent in good ways as ordained

by Allah in the Quraan:Righteousness is not that you turn your faces toward the east or

the west, but [true] righteousness is [in] one who believes in Allah,

the Last Day, the Angels, the Book, and the prophets and gives

wealth, in spite of love for it, to relatives, orphans, the needy, the

traveler, those who ask [for help], and for freeing slaves. (Chapter

2:177)



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3Concept & Principles of

Buying and Selling in Islam

Islam looks to wealth as a bounty from Allah the Almighty

Creator. We are ordained by Him, not to neglect orrenounce it, like the monks and hermits do. Almaalu walbanoonu bi Zeenat ul hayat tud duniya - The Wealth andChildren are the bounties and beauties of this world. Theyare precious, and also form a part of the trust and test from

Allah.

Buying and Selling (trading) is the core of Socio-Economics,be it in the form of Barter, Currency exchange or Electronic

trade. Trade is encouraged in Islam. But we are allowed to sell

and buy only that which has been lawful (Halaal) for us. For

example, we are not allowed to trade in Alcohol, which is

harmful to an individuals health, encourages evil actions and it

does not provide any real benefit to the society. Similarly thereare several business areas which we are prohibited to get

engaged for trade and business promotion, which ultimately

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lead to disruption and corruption in Individuals, Families,

Society and Humanity at large.

Allah has made trade lawful and Interest (and usury) unlawful.

Allah deprives riba of all His blessings and develops (blooms)

charity, and Allah does not like an ungrateful, sinful person

(Quran: 2:274-276)

Islam discourages abstention or hermitic isolation and favors

Economic trading activities. Nonetheless, Islam does not allow

us to make seeking livelihood and earning wealth as the highest

priority and concern in our lives. Islam outlines the key princi-

ples and ethics of trade such as fairness, sustainability, equity

and workers rights. This is the fundamental difference between

materialistic Economics and Islamic Economics. The city of

Mecca, the birthplace of Islam, was the center of commerce and

the early Muslims were not only engaged in trade but they often

went to distant lands in connection with business. Prophet

Mohammed (PBUH) was himself a trader known for his trust-

worthiness and integrity in his dealings. There are several teach-

ings of the Prophet (PBUH) that deal exclusively with sales,trade and commercial transactions. We will briefly examine

some of these basic principles here.

Fairness and Equity.

The concepts of fairness, equity, mutual respect and consider-

ation for others are inherent in the fundamental teachings ofIslam an integral part of business dealings between buyers and

sellers, and between employers and employees. This means that

self-interest only has a place in the community in as much as it



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takes into account the interests of others. We are therefore not

allowed to undertake an action or instigate a business transac-tion that will cause greater harm than benefit to the community

or environment. Intentions are of primary consideration and

any transaction or activity that is perceived to be harmful to the

other, even if it results in significant wealth to the seller is con-

sidered unlawful.

The Prophet Mohammed (PBUH) accorded great honor and

gave glad tidings to honest and ethical traders as below:

A truthful and trustworthy merchant will be in the company of

the Prophets, the Upright and the Martyrs - Tirmidhi.

Allah shows mercy to a man who is kind when he sells, when he

buys and when he makes a claim - Bukhari.

Allah (SWT) also instructs us in the Quraan as follows:

Give full measure and full weight in justice, and wrong not

people in respect of their goods (Quran: 11:85)

Woe to those that deal in fraud. Those who, when they have to

receive by measure from men, exact full measure. But when theyhave to give by measure or weight to men, give less than due. Do they

not think that they will be called to account? (Quran: 83:1-4)

Social Justice & Equality

Along with Fairness and Equity the concept of social justice is

paramount in Islam. Social justice includes a fair and equitabledistribution of wealth as well as protection of the weak from

economic exploitation by the strong. Allah (SWT) commands

Muslims to stand firm for justice at all costs:

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O ye who believe! Stand out firmly for justice, as witnesses toAllah, even as against yourselves, your parents, or your kin, and

whether it be (against) rich or poor: for Allah can best protect

both. (Quran : 4:135)

Our trades should be based on just social relationships

between producers and workers, as well as between buyers andsellers. Islam instructs us to defend and pursue just economic

relationships free of interest and usury (unfair profiteering).

Hoarding, Coercion and Exploitation

Taking advantage of someones plight, or hoarding and cre-

ating artificial supply shortages and charging a high price is con-

sidered exploitation and as such forbidden in Islam.

Islam encourages mutual consent between parties as a neces-

sary condition for a valid business transaction. It follows, there-

fore, that a sale under coercion is not acceptable in Islam.

Fair Treatment of Employees & Dignity of Labour

Islam encourages fair trade principles on the fair treatment ofworkers. Although Islamic law allows everyone the right to enter

into any lawful profession or occupation and to conduct any

lawful trade or business, there are several key principles that

guide the treatment of workers. Firstly, there must be clear and

proper contracts, preferably written ones. Secondly, all agree-

ments whether oral or written must be clear, transparent, justand lawful. And lastly, employees should know their duties and

responsibilities and be informed of their rights in terms of holi-

days and other allowances. It is the duty of both the employers



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and the employees to fulfil their agreements to the best of their

capacities, for the Quran states:

O you who believe, fulfil your contracts (Quran 5:1).

The dignity of workers must be respected. Importantly, no

work should be considered menial or degrading and they should

be treated with dignity and honour and have a humane and safeenvironment for work.

Prophet Mohammed (PBUH) said, Your brothers are your

responsibility. Allah has made them under your hands. So whoso-

ever has a brother under his hand, let him give him food as he eats

and dress as he dresses. Do not give them work that will overburden

them and if you do give them such task then provide them with assis-

tance (Bukhari)

Conclusion - Guidance on Earnings and Spendings

We are ordained not to get into excessive (undue) profita-

bility, Interest based transactions and income nor engaging or

supplementing any non-halaal buisnesses, Forward & Specula-tive trading, hoarding of goods. Honesty and transparency in

dealings, truthful declaration of saleable goods, giving workers

their timely wages and protecting their rights, is encouraged at

all levels. Thus our wealth has to be free from all evil, and

should not have caused any harm to the society at large.

Similarly, when it comes to our spendings, we are ordainednot to be wasteful or extravagant, not to engage in non-halaal

activities, not to be a miser, etc. We are heavily encouraged to

be charitable and voluntarily give substantial portions of our

Concept & Principles of Buying and Selling 11


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wealth to the poor, needy and the destitutes of our society.

One of the ordainment which is mandatory is Zakat, which isthe core subject of this book.



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4Is Zakat a Charity

Every religion has preached charity. However, the elevation

of Zakat in the Islamic law and its economic hierarchy has givenphilanthropy and charity a dimension of mandatory rights and a

statue of regularity. Zakat as assumed a prominence and perma-

nence, which is not encountered in any other socio-economic

structure. Islam has introduced a novel integrated model of

obligatory monetary transfer from the haves to the have-nots

according to divine mathematical calculations. This transfer

results in a regularized financial moderation and prevents the

formation of the critical gap between the wealthy and the poor.

Zakat is a full process, which results in the sanctification of the

individual and a purification of his/her wealth and helps build a

society of sufficency and security, which is the ultimate aspira-

tion of humanity as a whole.

There are divine codes of practice on how to obtain wealth,

how to administer that wealth and promote it for public benefit.

Allah also instructs that part of that wealth is the Divine Right

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of Allah to be distributed according to a divine fomula on the

percentage and the channel where it should be spent.The channels of expenditure are all directed to the social and

economic security of the less fortunate individuals of the

society. This system of Zakat has proved to be the most prac-

tical and dignified methodology by which the poor elements of

the society possess a right in the wealth of the affluent.

Zakat is not a charity, it is a right of the less-fortunate and des-titutes, by Divine sanction.



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5Zakat-ul-Maal and Zakat-Ul-

Fitr

Zakat-al-Maal commonly called as Zakat refers to the

annual obligatory charity which every believing man,woman, or child who is blessed with sustenance above theprescribed Nisaab is obligated to pay. This Zakat is con-sidered to be one of the five inviolable pillars of Islam. This

book is dedicated to the various aspects of Zakat-al-Maaland its related discussions. You will find below some defi-

nitions and information related to Zakat-Ul-Fitr.

Zakat-ul-Fitr

Zakat ul-fitr is the nominal charity which every believer is

obliged to pay on his and his familys behalf, once a year,

towards the end of the month of Ramadhan. Its given in the

form of dates, or barley or wheat or raisins, to needy believers inthe community so that they are made free from wants on at least

this one day of Eid Ul Fitr. Its purpose is to ensure that all the

needy and the poor in the society around us do not go hungry or

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left wanted, when all of us are celebrating the end of Fasting,

and for this reason this Eid is also termed as Eid Ul Fitr.

This was made obligatory by our Prophet Muhammad

(PBUH), upon all believers in the month of Shabaan of second

year of Hijrah. Its primary purpose was to purify the ones who

fast, from any inadvertent mistakes which may have taken place

through their acts or speech, during the fasting month. Thesocial benefit is to ensure that the poor and needy do not starve

on this day of Eid. This view is based upon the hadith reported

by Abu Dawud, Ibn Majah, and ad-Daraqutni from Ibn Abbas.

The Messenger of Allah (saws) enjoined zakat ul-fitr on the one

who fasts to shield ones self from any indecent act or speech

and for the purpose of providing food for the needy.

Hadith Related to Zakat Ul Fitr. (Sahih Al-Bukhari Hadith

2.579)

Allahs Messenger (saws) enjoined the payment of one Sa of

dates or one Sa of barley as Zakat-ul-Fitr on every Muslim: slave or

free, male or female, young or old, and he ordered that it be paidbefore the people went out to offer the Eid prayer.

Al-Baihaqi and ad-Daraqutni relate: The Messenger of Allah

(saws) enjoined the zakat ul-fitr, and also said: Free them (the

poor) from want on this day.

Because the payment of Zakat-ul-fitr is determined by theweight of food, it is possible that the exact amount might differ

slightly from country to country based on the cost of that food

in their country, but in most nations it is calculated to be



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between US$5.00 to US$8.00 per person in the family and

household.It is accepted as zakah for the person who pays it before the

Eid salah, and it is sadaqah for the one who pays it after the

salah.

Unlike Zakat Ul Maal, which is obligatory on only the owner

of the wealth above Nisaab, Zakat Ul Fitr is obligatory on theguardian of the family and calculated once for each and every

member of the family, including the kids and newborn. Its such

a noble thought and cause, that we should try and ensure that

this is given duly on time to the needy ones around us, so that

they are included in the celebrations of Eid Ul Fitr.

Zakat-ul-Maal and Zakat-Ul-Fitr 17


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6Nisaab - The measure of

Wealth

For any economic system to be timeless, there has to be a

formula which clearly defines the line between poverty andaffluency. Nisaab is the cut-off point which draws that line

between the haves and have-nots. Islam has based this onreal currency of Gold and Silver, as these get inflationadjusted automaticallyover time.

If a believing individual, possesses gold (equivalent to about

86 gms) or Silver (about 595 gms) or its equivalent value, in anyother form (cash, etc), then zakat is liable on him/her. Gener-

ally silver is lower in comparative value, so if you are calculating

cash or cash equivalent, then one has to find the current market

rate of silver and arrive at the Nisaab accordingly for 595gms).

This becomes the cut-off value for Nisaab.

Once the level of Nisaab is crossed, then zakat has to be paidon the entire wealth, and NOT on the total wealth minus

Nisaab. e.g. if you possess 100gms of gold, then zakat is to be

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calculated on the total 100gms and not just on the difference

100-86 (14 gms).



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7Who is Eligible to Receive

Zakat

While the Almighty Allah, has ordained who should pay

Zakat, there are clear directives and criteria on those whoare eligible to receive Zakat. There are eight groups ofpeople on whom Zakat should be spent, as mentioned inthe Quran:

The alms are only for the Fuqara (the poor), and Al-Masakin

(the needy) and those employed to collect (the funds); and for toattract the hearts of those who have been inclined (towards Islam);

and to free the captives; and for those in debt; and for Allahs Cause,

and for the wayfarer (a traveler who is cut off from everything); a

duty imposed by Allah. And Allah is All-Knower, All-Wise. [Al-

Quran 9:60]

They ask you as to what they should spend. Say: Whateverwealth you spend, it is for the parents and the near of kin and the

orphans and the needy and the wayfarer, and whatever good you do,

Allah surely knows it. [Al-Quran 2:215]

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(Alms are) for the poor who are confined in the way of Allah

they cannot go about in the land; the ignorant man thinks them tobe rich on account of (their) abstaining (from begging); you can rec-

ognize them by their mark; they do not beg from men importu-

nately; and whatever good thing you spend, surely Allah knows it.

[Al-Quran 2:273]

And give to the near of kin his due and (to) the needy and the

wayfarer, and do not squander wastefully. [Al-Quran 17:26

]

1. Fuqaraa:Those who own property and wealth in excess of

basic necessities but below the value of Nisab.

2. Masakeen: Persons of extreme poverty who possess no

wealth whatsoever. They are the destitutes.

3. Aamileen: (Zakat collector) Those persons who are

appointed by an Islamic Head of State or Government to collect

Zakat. It is not necessary that this be a needy person.

4. Muallafatul Quloob:Those poor and needy persons who

are given Zakat with the intentions of solidifying their hearts

because they maybe recently converted to Islam or to bring

them closer to Islam.

5. Ar-Riqaab:Slaves whose masters have agreed to set themfree on a payment of a fixed amount. Zakat may be used to pur-

chase their freedom.

6. Ibnus-Sabeel:A traveler, who, whilst wealthy at his place

of residence, is stranded and in need of financial assistance.

7. Al Ghaarimeen:A person whose debts exceeds his assets

and his net assets (after deducting his liabilities) is below theNisab limit. To determine whether a person qualifies, his basic

necessities of life (house, furniture, clothes, vehicle, etc.) will



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not be taken into account. It is conditional that the debts were

not generated due to any un-Islamic or sinful act.8. Fi Sabeelillah:Those who are away from home in the path

of Allah. Those in Jihaad, those seeking knowledge or a stranded

Haji may be assisted with Zakat if they are in need.

Who cannot be given Zakat?

1. Zakat cannot be given to parents, grandfather, etc., or toones children and grandchildren. A husband and wife cannot

give Zakat to each other.

2. Zakat contributions cannot be given to such institutions or

organizations who do not give the rightful recipients (Masaarif)

possession of Zakat, but instead use Zakat funds for construc-

tion, investment or salaries.

3. Zakat funds cannot be given to non-Muslims, although

other forms of charity can be given to them. The same ruling

applies to Waajib Sadaqah, i.e., Sadaqatul Fitr, Kaffarah, Ushr

and Nazr. Nafl Sadaqah could be given to non-Muslims.

4. If one cannot determine whether the recipient is needy or

not, then it is better to make certain before giving him Zakat. If

Zakat is given without inquiry and subsequently it is known thatthe recipient is wealthy then the Zakat is not valid. It has to be

re-paid to the needy, once again.

5. Zakat will not be fulfilled by purchasing books for an insti-

tution, or land purchased for public utility and made Wakf.

There are other Charity and Sadaqahs for this purpose.

6. Zakat cannot be used for the Kafn of a deceased personwho has no heirs, because at that time he/she cannot become

the owner.

7. A dead persons debt cannot be paid from Zakat.

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Some Additional Queries on Zakat Payments1. It is not permissible according to Shariah to give Zakat to a

person who owns merchandise or wealth in excess of his needs

to the value of Nisab nor is it permissible for such a person to

accept Zakat.

2. A person that does not own an amount equal to the value

of Nisab is known as Faqir. This person could be given Zakatand it is permissible for him to accept it.

3. If a person owns wealth which in value exceeds the amount

of Nisab, but this wealth is not intended for business nor does

he require it for his daily needs, such a person is regarded as

well-to-do and should not be given Zakat.

4. The books of a scholar or tools of a tradesman are among

his necessities, irrespective of their value. Besides these if he

does not own wealth equal to Nisab, he could be given Zakat.

5. When giving Zakat, Sadaqah, etc., ones poor and needy

relatives should be given preference. To avoid embarrassing

them, it should be given to them without saying that it is Zakat

or Sadaqah.

6. There is great thawab (reward) in giving Zakat to poor per-sons who are striving in the way of the Deen or those who are

engaged in religious knowledge, or to religious institutions

where poor or needy students are being cared for. Care should

be taken that only such institutions are given Zakat where it is

used according to the Shariah.

7. A child of a wealthy father cannot be given Zakat. Whensuch a child becomes mature in age, and does not own wealth to

the value of Nisab, he may then be given Zakat.



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8. Zakat can be given to: brother, sister, nephew, niece

(brothers and sisters children), uncle, aunt (both paternal andmaternal), step-grandfather, step-grandmother, father-in-law,

and mother-in-law.

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8Difference between TAX and

Zakat

There is a fundamental and a more humane differentiation

on how modern day Taxes and Zakat differ. Zakat is paidon the excess wealth, of a person, after all his basic necessi-ties are catered and paid for. Taxes are deducted directlyfrom ones Income, irrespective of the expenses and theneeds of the earner. Zakat is paid on a persons wealth andand never on income. It is a form of Thank-you-my-Lord

for providing me in excess of my needs and requirements. Secondly this helps the economic balance and flow of

wealth to the needy and the poor.

Thus there is no Zakat directly on Salary. It is only on what

one is left with after making room for his and his familys liveli-

hood.

On livelihood, there are those who question on what is theline between luxury and needs! What do we consider a neces-

sity for livelihood and what falls outside of it. I think we should

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follow the basic guidelines but one has to leave this on an indi-

viduals judgement, for it is the individual who will ultimatelyface Allah. In all cases, excessive unnecessary spending, which

may be termed wastage is called Israaf in Islam, which is for-

bidden. If the intention is to reduce ones zakat payments, then

Im sure we can find many excuses to classify luxury as necessity.

However, the thumb rule is that zakat is calculated on an indi-

viduals wealth!! Also 2.5% is the minimum, and need not belimited exactly to 2.5%.

How is this different from the capitalist system.

Capitalist economic system does not care for families or for

how one leads his life. It mandates a deduction of tax at source

on a monthly/annual basis, as the case may be in each country.

The taxes deducted usually range beteen 30%-55% of the indi-

viduals income. Whereas Islamic economic system takes a very

small portion (2.5% ) of the leftover (accumulated) wealth of an

individual which has stayed with him/her over a period of one

full year. Thus you can see how un-burdening is this formula,

both from quantitative as well as practical perspective. You pay

only if you save, and in case you had to spend all of what youearned, then there is no Zakat.

Islamic way is highly scientific, practical and effective: Example:

Qassim earns $80,000 per annum from his job and his wife is

a homemaker. They have one child and no other liabillities or

responsibilities and end up saving 25,000 every year. His friend

Khalid earns $90,000 and his wife is a homemaker. They have 4kids and have their parents to be taken care of . They end up

saving only 5,000 every year.



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Qassim pays lesser taxes than Khalid, although he saves a lot

more, and Khalids expenses are much higher as he has to takecare of his larger family.

In Islam, this differentiation is accounted for, and Khalid pays

less because he saves less and Qassim pays more because he is

able to save more. Subhanallah!!

Difference between TAX and Zakat 29


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9Should Zakat be paid onPreviously paid wealth?

QUESTION: If the zakat is paid on the jewellery and prop-

erty or cash balances in a given year, and if there is increasein its value, do we still need to pay zakat on the same next

year?

ANSWER: Yes, Zakat has to be paid annually on all the accu-

mulated wealth, even if you have already paid the zakat on it ear-

lier. This is like the thanksgiving to Allah for having given you

the wealth and maintained it for one full year. Traditionalworldly taxation system is based on a hefty portion of the

income and not on savings (wealth) of a person. Zakat is calcu-

lated only at 2.5% of ones savings. This does not create any

burden on the payer, and it helps to serve a bigger and better

cause than the taxes that many governments impose. Of course

an economic system ordained by the Creator himself, is boundto be flawless and much more superior than the manmade taxa-

tion system.

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10Zakat on 401K, Provident

Fund & Gratuity

Zakah as per our Shariah, is only applicable on ones excess

wealth, if it has been in ones possession for a period of onefull lunar calendar year. Since you have not actuallyreceived your gratuity, and neither was it deducted from

your salary, you obviously do not have possession of thatportion of your asset - thus you will NOT be liable to payzakat on it until you actually receive it and the amount has

been in your possession for a period of one full lunar cal-endar year. Hence there is no Zakat payable on the accruedgratuity, as its only notional, until the day its received.

Zakat on Provident fund / 401K / Pension Plans

Provident Funds and Pension plans have two portions of sav-

ings attributed to it.A) This is a compulsory (mandatory) portion which is

deducted from the salary and generally matched in equal

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measure by the employer, and this amount is deposited into the

FUND/Plan.B) There is a second voluntary (non-mandatory) portion

which one can opt-in to voluntarily deduct an excess amount

every month, as a savings for future maturity.

There is NO zakat on the (A) portion above.

Zakat should be calculated at 2.5% on the accumulated total(B) portion.

The main reason for zakat being applicable on B portion is

that this amount has been voluntarily kept as savings by the

employee and it was never mandatory on him/her.

EXAMPLE on PROVIDENT FUND

QUESTION: My query is on Zakat payable on Provident

Fund. I have my PF contribution in company since last 8 years,

so I have to pay 2.5% of entire 8 years contribution OR of last

one year only?

ANSWER: Its important to understand how Provident

funds operate. In simplicity:

A = Employers contribution to the fundB= Employees compulsory contribution to the fund which is usu-

ally equal to A. This is automatically deducted from the salary of the

employee.

C = Addional (voluntary) contribution by the employee to the

fund.

Total Provident fund isA+B+C.The consensus of Ulema is that Zakat is not mandatory on

the A and B portions, as this amount only reaches the employee

after its maturity. It is deducted before the paycheck reaches the



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employee. So Zakat is to be paid on maturity (ie. at the time of

retirement of the fund)On the C portion, since it is paid voluntarily, with the main

idea of savings, then Zakat has to be paid on this portion every

year, on the cumulative amount.

e.g. If a persons salary is say 10,000 per month. Lets consider the

rate of compulsory PF contribution is 5%. Voluntary contribution

decided/agreed by the employee is an additonal 7.5%. ThusA= 5% of 10,000 x 12 months = 6000 per annum

B= 5% of 10,000 x 12 months = 6000 per annum

C= 7.5% of 10,000 x 12 months = 9000 per annum.

Zakat has to be paid on 9000 every year, cumulatively. e.g.

One has to find out the total portion of his voluntary contribu-

tion and pay zakat @2.5% of the value of C. (However, if one

gives zakaat on his portion of B then this is a very good gesture

and Inshallah, Allah will reward him/her enormously)

At the end of first year you pay 1*9000*2.5% = 225

At the end of second year you pay 2*9000*2.5% = 450

At the end of third year you pay 3*9000*2.5% = 675

At the end of sixth year you pay 6*9000*2.5% = 1350

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11Zakat on House Mortgages

and Car Loans

Many of us have Cars and Homes bought through mort-

gages, both Islamic and from conventional banks. **Riba(Interest) is not Halal in any form, but I am not deviating intothis discussion here**. For purposes of calculation of liabili-ties related to car loans and mortgages, most scholars areunanimous in their rulings that the impending loan is not to

be termed as liability. For those of you using the Zakat Cal-

culator spreadsheet, please do not input your outstandingloan amounts as liabilities in the Zakat Calculator. (i.e.please ignore the outstanding loan amounts)

E.g. If you have a house mortgage of USD 100,000 and so far

you have paid $30,000, then you should not consider the 70,000

as a liability. The same applies for Cars taken on loans for per-

sonal usage.On the monthly installment payments made for mortgages,

you do not have to count (add or discount) these, as they are

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automatically deducted from your wealth. e.g. if you earn

$10,000 per month, and your expenses are $6000 and Loanrepayments are $2500, you will have a nett savings of $1500 per

month. Zakat will be liable on $1500 savings if it remains with

your for one year. This continues so on and so forth for each

month of the year.

Sample Q&A on this subject

QUESTION : Please note that I have taken a loan from the

Company for the purchase of a Car and the loan amount is

much higher than the amount calculated for Zakat..Kinldy

advise whether the loan amount can be deducted from the

amount calculated for the Zakat or not.

ANSWER : Well, this is a common question in todays world.

Although a mode of transport (car, etc) and a home for personal

use are exempted from payment of Zakat, it does not necessarily

mean that the loan taken on a luxury should be deductible from

Zakat. Technically you would consider that as a loan payable,

and can argue it to be a deductible liability. But on the other

hand we dont calculate the full value of the car or home towardsour wealth.

Zakat is the right of the poor and the needy and we should

not deprive them from their rights. This is my own perspective

and I request you to think internally within yourself and, before

forming an opinion. The general consensus of Scholars is that,

our mortgages and car loans and personal loans taken to spendon our other luxuries of life are not to be considered as Liability

deductible for Zakat. Hence in the Zakat Calculator spread-

sheet, you may not add these values in the Liabilities Section.



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12Zakat on Property

Investments

Investments in Real Estate and property is one of the main

areas of our wealth distribution, where significant effortsand time and money is put in. We all long for our ownhome, and in addition invest more into real estate as itsconsidered one of the safest forms of investment. Onlanded property or lands itself, its the intention (niyyah) ofownership that determines the zakat applicability. If the

land or property is purchased or built for the purpose oftrading and as a business, then the total value becomeszakatable. If the land or property is bought for purpose ofrental or personal living, then zakat is only to be paid on therental income - after deduction of maintenance & expensesdirectly associated with it. No Zakat is applicable on total

value of the land/building.For personal living and household, there is no zakat appli-

cable, even if you own more than one house, however as

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explained above, if there is a rental income associated, then one

should be paying Zakat on that income.

Our entire Imaan is based upon Intentions (Niyyah). This

question of being unsure is wholly related to ones niyyah and

generalization is not possible.

QUESTION - Suppose, I have a property that I have ear-

marked to generate income by means of value appreciationwhen I sell it, say after 10 years. Now, this property is also gen-

erating some income additionally by means of rent. So, in this

case, do I have to calculate Zakat on the current market value of

the property + the income generated through its rent.

ANSWER: This is all based on Niyyah. If you have decided

that this property (land) is bought for the sake of selling off and

making capital gains, then you have to treat it as another asset in

your possession. If you have taken it precisely for rental purpose,

or for building a house/structure for rental or own usage, then

you have to include it in accordingly for calculations.

In your case since you have both the options open (and your

Niyyah is clear about this), you can use your second option of

paying zakat on the rental income and then pay zakat on the fullvalue of the land once you decide to sell it over. We need to

have a clear conscience and pray Allah for no wrongdoings.



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13Zakat on Loans given to

Friends

We all come across situations in our life, where one has

helped someone in dire needs, and given some money notas charity, but as a loan to be returned back at some point inthe future. In very difficult situations, such as medicalemergencies, marriages, loss of job, etc., the person takingthe loan is generally not in a position to discuss how and

when the loaned amount would be returned. Ideally

speaking any transaction should be recorded in writing,with two witnesses, as per the practice and preachings ofour Prophet (PBUH). However, in most cases we do notput this on record, and generally leave it to good faith as cir-cumstancial and cultural ethos come into play. Howshould be the treatment on such loans, when we calculate

our Zakat. I have tried to explain this through a questionasked by a brother as given below.

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QUESTION - I have given loans to my brothers, sisters,

friends or relatives. I am not sure when will they pay me back.How should I calculate zakat on this.

ANSWER - Technically, all loans given out are considered to

be your property and wealth. There can however be two dif-

ferent scenarios:

Returns expected and assured:

If returns are assured then you have to pay zakat on it every

year, as if it was your own money / wealth. However some

Ulemas give a verdict and a concession saying that you can pay

the zakat once you receive the amount, but you will have to pay

retrospectively, i.e. for all the time that you have not paid zakat

on.

Returns Unexpected or Unsure:

If some loans are given to relatives/friends, where you have

given it without an expectation to receive it back, then in such

cases, one can start paying zakat on them from the time you

receive the amount back. Its the intention (Niyyah) that is

very important to be taken into consideration in all our acts.May Allah guide us to the right path, always. Aameen.



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14Who Should pay Zakat on

Wifes Gold Ornaments

A very pertinent and common question, especially amongst

the families of Asian and Indian subcontinent is the issue ofwho should pay Zakat on the gold and silver jewelleryowned by the wife. Generally the wives are homemakers

with no specific income of their own and at the time ofannual Zakat payments this can lead to some key decisions.The husbands argument is that these ornaments were pre-

sented to the wife by her father or brother, and as a hus-band, he exerts no rights on that jewellery. Some of us con-veniently invoke the Islamic philosophy of segregation ofownership of wealth. In such cases, who is liable to pay theZakat.

As per Islamic teachings, the owner of wealth above Nisaab,

regardless if he is a man, woman or child, is the one who is liableto pay the Zakat on it. This is irrespective of the fact, that wife

in this case, does not have any additional income to pay the

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Zakat from. The husband (or guardian) of the woman is not

liable to pay Zakat for her. However if the husband, or fatheror brother or son of the woman, of their own will and without

compulsion, wishes to fulfill the zakah obligation for her, there is

no harm and inshallah would be rewarded many times for their

act of benevolence by Allah (SWT). For any reason, if she is not

able to get the Zakat amount on time, then in such cases she is

obliged to pay off the Zakat due, even if she has to sell 2.5% ofher jewellery.

Hadith:

Sunan of Abu-Dawood Hadith 1558 Narrated by Abdullah

ibn Amr ibn al-As

A woman came to the Messenger of Allah (saws) and she was

accompanied by her daughter who wore two heavy gold bangles in

her hands. He (saws) said to her: Do you pay Zakat on them? She

said: No. He (saws) then said: Are you pleased that Allah may

put two bangles of fire on your hands? Thereupon she took them off

and placed them before the Prophet (saws) saying: They are for

Allah and His Messenger (saws) (to distribute to the poor as they

will).

Regardless of whether the woman herself pays the zakah for

the wealth she owns, or whether her father, or husband, or son,

or guardian chooses to pay the Zakat for the wealth owned by

her, provided the annual Zakat dues are paid on her excess

wealth, the woman would have deemed to have fulfilled herobligatory duty of Zakat.



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15The Calculations of Zakat

Calculation of Zakat has always been thought of a compli-cated process by many of us. My first endeavor to popu-larize and simplify the concept of zakat and its calculations

was to come up with a simple spreadsheet which providesall the elements of Zakat into a single window. This spread-sheet is available online and you will have to refer to the

website www.zakatonomics.com [http://www.zakato-nomics.com] and download the latest version of thespreadsheet. Inshallah, it will assist you in the calculation of

your Zakat.

The instructions are also available on the spreadsheet, but for

reference, they are also given below in this chapter. These are

simplified, to the point instructions and clarifications. You may

use the details of each section below in conjunction with the

Calculation Spreadsheet.

Zakat on Pure Gold and Gold Jewellery

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Zakat should be calculated at 2.5% of the market value as on the

date of valuation (In our case we consider 1st of Ramadhan).Most Ulema favour the Market Value prevailing as on the date

of Calculation and not the purchase price.

Zakat on Precious and Semi-Precious Stones

There is considerable contention on whether these are to be

considered for valuation. In my humble opinion if they have avalue, then they calculate towards your wealth, and it is on the

wealth that Zakat is mandatory. However please consult with

Ulema, before acting on this section. Most Ulema contend that

a diamond is a piece of carbon and its value varies, unlike that of

gold or silver.

One may calculate the Saleable Value of Items-at-hand on the

date of Zakat Calculation.

Zakat on Silver.

Zakat is to be paid on Silver in Pure form or Jewellery, Utensils,

Decorative items and all household items including crockery,

cutlery made of silver at 2.5% of the prevailing market rates.

Zakat on Cash and Bank BalancesZakat should be paid at 2.5% on all cash balance and bank bal-

ances in your savings, current or FD accounts. The amount

technically should be in the bank for one year. Usually it hap-

pens that the balance keeps on changing as per personal require-

ments.

You may make your best judgement and the best way is to payon remaining amount on the day of calculation

Zakat on Loans Given, Funds, etc



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Zakat is payable by you on loans you have given to your friends

and relatives. It should be treated as Cash in Hand. You maydeduct Loans Payable by you to arrive at the nett present value

of your wealth. However, if you are in doubt, on the return of

your money, then you may not calculate it as your wealth. You

can add it to your wealth, if and when your receive your

money.

Zakat is payable on all Govt Bonds, Public Sector Bond, paid-upInsurance premiums, your paid-up portion of Provident Funds,

Govt Bills receivables, etc. Pls remember you need to be aware

of what the sharia says about Insurance and other types of

investments. It is outside the scope of this Zakath Calculator.

Zakat on Landed Property

Zakat is not payable on personal residential House even if you

have more than one and meant for residential purpose only.

Also Zakat is not applicable on the value of Property given on

rent irrespective of how many. However Zakat is payable on the

rental income itself after deducting the maintenance and other

expenses.

However if your intention of holding properties is to sell at a

future date for a profit or as an investment, then Zakat is payableon the Market Value of the property. Also, if your intention of

holding properties changes in the current year, i.e. from self use

to business then you need to pay Zakat on that Property Value.

Zakat on Business:

This is for Business Persons only. No matter what business you

are into, youve got to pay Zakat on all STOCK-IN-TRADE.The stock must be valued at its Landed Cost Price. If you have

any bills receivable (sales given on credit) then you need to add

the same towards calculations.

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Deduct the Amounts due to your suppliers and deduct the loans

on stock on the date of calculation. Dead Stock should be calcu-lated on scrap value or its saleable value. Damaged stock should

also be valued at its scrap value.

Be honest in the calculations, as ZAKAT is an INSURANCE on

your STOCK directly from ALLAH and who better an insurer

than Him.

There is no Zakat on Factory Buildings or any kind of machi-nery, but there is zakat on products produced in the factory (i.e.

finished goods value). Please refer to competent Ulema or a

scholar who can shed more light on your specific issues.

Zakat on Partnership Firms.

Zakat can be paid EITHER by the firm OR separately by the

owners. If the firm is not paying, and the partner wants to calcu-

late his share, he should take the amount standing to his capital

and loan account as per the last balance sheet. Add his estimated

share of profit till the date zakat is calculated.

This can only be estimated as it is difficult to calculate the exact

profit or loss between an accounting year.

Zakat on Agricultural ProductZakat is payable on all Agricultural produce including fruits,

commercially grown flowers, vegetables and all types of grains at

the harvest time itself. The passing of One year does not apply

for agrultural produce. If there are two or more crops on the

same land per year, then Zakat has to be paid as many times on

the crop, irrespective of the time.The Consensus formula for Zakat calculation on Agriculture is

as follows:



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On crops dependent purely on rain water it will be 10% of pro-

duce, On crops not irrigated through rain water but use CanalWater, Tank Water, Borewell and Open wells, the Zakat is 5% of

the produce. For Crops dependent partly on Rain Water and

partly on other water, the Zakat applicable would be 7.5% of

produce.

Zakat on Animals

On all grazing animals like goats, sheep, camel, cows, broiler

chickens, the consensus Zakat payable is one animal/bird for

every 40 animals owned. However you may wish to give cash in

lieu of the animal/bird itself.

Please consult your local Scholar or Maulvi or Imaam who can

guide you to the right direction, or refer to books of Fiqh if you

would like to have first hand confirmation of the situation.

Liabilities Deductions

If you have any pending tax payable to the govt, as of the date of

Zakat Calculation, then the same may be deducted before

arriving at the net worth. If you have taken any loans from any

person or institution, and if you have not already deducted thesame from any of the above sections, then you can deduct your

Payables over here. Please be truthful, as Zakat is a sure way of

protecting ones wealth if Zakat has been paid on it regularly and

fully.

LOANS taken only for Zakatable-Wealth should be deducted.

Cars, Houses, etc are not Zakatable wealth. So any loan/mort-gate taken for these purposes are not to be deducted.

FOOTNOTE: Please note that RIBA in any form is Haram

and strictly prohibited. So please stay away from taking Loans

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on Interests AND Collection of Interests from any body or insti-

tution or other forms of RIBA.COPYRIGHT NOTICE: You are free to distribute this Calcu-

lator, by email, by print or by posts over the Internet. My inten-

tion in creating this was to make the task of Zakat as simple and

easy as the act of Zakat itself. However if you are making any

modifications or changes please keep me informed.


zakatonomics ebook may 2013

Documents

basics of zakat

concept of wealth

paid wealth

measure of wealth

wealth distribution

student of islam

various queries

various communication