Zakat: What is Zakat? – Best 6 Benefits of Zakat assets

What is Zakat?

Zakat

 Lexically, the word Zakat covers two meanings.

  1. Purification
  2. Growth and increase

In the terminology of the Quran and Sunnah, Zakat is the portion of asset that is made mandatory to be spent in the ways specified by Allah Ta’ala.

Legally, zakat can be defined as “the amount of money or kind taken from specific types of wealth when they reach a specific amount at a specific time which must be spent on specific categories in specific ways”. It can be paid in both in the form of cash and kind. It is not charged on all types of wealth, for example, profit from waqf assets.

Literally, zakat means growth or increase in terms of the payers’ psychological growth and material growth in the soul and the recipients’’ wealth. Paying zakat makes the payers’ wealth purify, heart free from selfishness and greed and recipients’’ heart away from jealousy and hearted towards the rich. It has been evidenced from the following sources: So establish regular Prayer and give regular Charity; and obey the Messenger that ye may receive mercy (Surah Nur: 56).

Those who establish regular prayers and give in regular charity, and also have (full) assurance of the hereafter (Surah Naml: 3). Those who believe, and do deeds of righteousness, and establish regular prayers and regular charity, will have their reward with their Lord: on they shall be no fear, nor shall they grieve (Surah Baqarah, 277).

He is a third pillar of Islam and in the Al-Quran, the term zakat is mentioned around 70 times together with the prayers. It is compulsory on all Muslims who have the financial means (nisab) to meet this obligation. Nisab in Islamic jurisprudence is the minimum amount of property or wealth that must be owned by a Muslim before he/she is obligated for zakat. It is also defined as a measurement that determines the obligation for paying zakat for male or female Muslims.

Hadith

Each of the most trusted hadith collections in Islam have a book dedicated to zakat. Sahih Bukhari’s Book 24, Sahih Muslim’s Book 5 and Sunan Abu-Dawud’s Book 9 discuss various aspects of zakat, including who must pay, how much, when and what. The 2.5% rate is also mentioned in the hadiths.

Zakat: Hadrat Abdullah bin Muawiyah (Radi Allaahu Ta’ala Anhu) narrated that the Prophet said: There are three acts which when one does he would taste the sweetnees of faith: worshiping ALLAAH alone, believing that no one other than ALLAAH is fit to be worshipped , and paying Zakat on one’s wealth every year that his self urges him to it and feels happy (instead of restraining it)

Note:  The rank of Zakat is evident from its being mentioned together with tauhid and its effect from the fact that it augments the delight of Iman.

Warning to the defaulters of Zakat

Hadrat Abu Hurairah (Radi Allaahu T’ala Anhu) narrated that the Prophet said. “if ALLAAH gives someone prosperity and he does not pay the Zakat on it, his prosperity will be made to appear to him on the day of resurrection as a large bald snake with black spots over its eyes. it will be put round his neck on the day of resurrection and then it will seize his jawa then says, I am your property; I am your treasure – He the recited:

وَلَا يَحْسَبَنَّ ٱلَّذِينَ يَبْخَلُونَ بِمَآ ءَاتَىٰهُمُ ٱللَّهُ مِن فَضْلِهِۦ هُوَ خَيْرًۭا لَّهُم ۖ بَلْ هُوَ شَرٌّۭ لَّهُمْ ۖ سَيُطَوَّقُونَ مَا بَخِلُوا۟ بِهِۦ يَوْمَ ٱلْقِيَـٰمَةِ

(And let not those who hoard up which ALLAAH hath bestowed upon them of His bounty think that it is better for them. Nay it is worse for them. That which they hoard will be their collar on the day of Resurrection. [Quran iii/180], [Bukhari, Nasai]

EXHORTATION FOR TARGHIB

Hadrat Asma daughter of Abu Bakar  -As- Siddiq (Radi allaahu Ta’ala Anhu) narrated ALLAAH’s Messenger  as saying,  “Spend , do not calculate (i.e. do not be anxious as to how much you have and how much you are giving in the way of (ALLAAH) and so have ALLAAH calculating against you, do not hoard and have ALLAAH hoarding for you (i.e, the doors of mercy and blessings are closed on you), but give such amounts as you can big or small and give with open heart. (Bukhari-Muslim]

Benefits of Zakat

Zakat has two straightforward benefits.

Firstly, the payer himself gets purified from inner germs of the spiritual diseases.

Secondly,  Zakat  helps  those   who   are   not able    to  fulfill   their  needs independently. For e.g. orphans, widows, handicaps, poor people etc.

Allah Ta’ala says in Surah Taubah:

َTake sadaqah (obligatory alms) out of their wealth through which you may cleanse and purify them, and pray for them. Indeed, your prayer is a source of peace for them. And Allah is (All-) Hearing, (All-) Knowing. (103)

At-Taubah 9:103

This verse has explicitly mentioned the first benefit i.e. purification of inner self. The second benefit is not mentioned in this verse. It points to the fact that the real purpose and objective of paying Zakat is the purification of one’s own self, though the second benefit exists in its inference. (Ma’ariful Quran)

Retribution for not giving Zakat

Allah Ta’ala says in the Quran:

“As for those who accumulate gold and silver and do not spend it in the way of Allah, give them the ‘good’ news of a painful punishment” (34) on the day it (the wealth) will be heated up in the fire of jahannam, then their foreheads and their sides and their backs shall be branded with it: “this is what you had accumulated for yourselves. So, taste what you have been accumulating.”(35)

At-Tawbah 9:34-35

The holy prophet (PBUH) said:

Every nation that does not give Zakat, Allah Ta’ala will afflict them with a drought.

Narrated Abu Huraira: Allah’s Messenger (PBUH) said,

“The person whom Allah has bestowed with wealth, yet does not give its Zakat, on the Day of Judgment, his wealth will be turned into venomous bald serpent with two black spots over the eyes (or two poisonous glands in its mouth) which will wind around his neck and bite his jaws and say: ‘I am your wealth, I am your treasure.’ “Then the Prophet (PBUH) recited the holy Verse: “Let not those who covetously withhold….” (to the end of the Verse).

Sahih Al-Bukhari Hadith 1315 and 4199

Payer of Zakat

Zakat must be paid by the one who is:

  1. Muslim
  2. Major (Baligh)
  3. Sane
  4. Sahib-un-nisaab (owner of wealth above the level of nisaab)

Above-mentioned four conditions are described respectively in the following lines:

  • Zakat is not obligatory on a non-Muslim as Zakat is an ibadah (an act of pure worship) and a non-Muslim is not obliged to carry out the ibadah of
  • A person must be major to qualify as a Zakat payer. Minors are not under a fard obligation to perform acts of ibadah such as prayers (salaat) and fasting (saum) because they lack legal capacity. They are accordingly exempt from paying Zakat by reason of absence of legal capacity.
  • The Zakat payer must be sane. In this regard, two situations must be distinguished:
    1. The child who at maturity is insane. In this case, the insane person upon regaining his intellect is exempt from payment of Zakat for the duration of his insanity. Liability for Zakat attaches to him from the time he regains his sanity and accordingly his Zakat year is calculated from such
    2. The person although sane at the time of maturity subsequently thereto becomes insane. In this case, if the insanity lasts for a whole year, the insane person is exempt from Zakat for this period, and his Zakat year is therefore deemed to commence from the date of recovery of sanity. On the other hand, if the insanity remains for a part of the year, then he is liable for the Zakat of that
  • Nisaab is described in the following lines.

Definition of Nisaab

 Nisaab is the threshold or line, which separates those who are duty bound to give Zakat from those who are not. In other words, Nisaab is the minimum amount of wealth whose owner is deemed to be wealthy in the conception of Shari’ah and Zakat is obligatory on him. For example, one who owns 87.48 grams of gold or 612.36 grams of silver or its equivalent amount of cash or trading assets etc. is called Sahib-un-nisaab and it is obligatory on him to pay Zakat (i.e. 2.5% of his total zakatable assets) to those who deserve Zakat. A detailed description of those that are eligible to receive Zakat is described in the coming topic “Recipient of Zakat”

Zakat on debts

 Debts can be classified into two types:

  1. Receivables  i.e owned to onself e.g  Loans given to somebdoy.
  2. Payable to others e.g. Money borrowed from

Debts receivable from others

 There are different types of debt receivables. The ruling of Zakat for each kind of debt receivable is different from the other. It is therefore pertinent to first understand all these types of debts receivable.

Types of Debts Receivable

 Imam Abu Hanifah (R.A.) has classified debts into three categories, namely:

  1. Trade Debts
  2. Non-Trade Debts
  3. Other Debts

 

  1. Trade Debts are called dain qawiyy(دﻳﻦ ﻗﻮی ) in the terminology of Islamic Jurisprudence. These debts are those that arise in respect of:
  • Trading stock sold and delivered in the ordinary course of business;
  • Moneys lent and advanced;
  • The loan of gold and

For example, a trader sells goods (on credit) to another for purchase price of Rs.5,000/-; or A lends B Rs. 10,000/-. The ruling for this class of debts is that the creditor, upon receiving the amount owing to him, is obliged to pay Zakat for the entire preceding period of credit.

  1. Non-Trade Debts are called dain mutawassit (دﻳﻦ ﻣﺘﻮﺳﻂ ). These debts are those that arise in respect of the sale of goods other than the trading stock.  For example, the purchase price of the sale of personal clothing, or motor vehicle or land.

The preferable view, which is one of the two views narrated from Imam Abu Hanifah, in the case of such debts1 is that Zakat is not payable for the preceding years but is only payable for the Zakat year calculated from the time of repayment of the debt.

  1. Other debts are called dain Zaeef ( دﻳﻦ ﺿﻌﻴﻒ). These debts are those that do not arise from the sale of goods or property. For example, debts receivables in respect of inheritance, dowry, rentals, wages, and provident fund

The ruling for this class of debts is that Zakat is not payable unless full amount is paid and one Zakat year passes thereon after payment. No Zakat is payable for preceding years.2

Debts payable to others

 Zakat payer, in order to be sahib-un-nisaab, must be free of debts. If he is indebted to his creditors, then the amount of his debts must be deducted from the total value of those assets on which Zakat is levied. The balance remaining will be subject to Zakat. If there is no balance remaining, no Zakat is obligatory.

Note

It should be kept in mind, that the ruling mentioned above regarding the treatment of debts payable is related to the person who is not a corporate businessman. However, if some one has a corporate business, then the ruling is that, only those debts are to be deducted from zakatable assets that have been utilized in purchasing fixed assets such as machinery etc. On the other hand, if debts of a corporate businessman are utilized in purchasing zakatable assets such as inventory etc., then they will not be deducted from the total value of the assets on which Zakat is levied. 1

Recipients of Zakat

The Holy Quran has fixed eight categories of recipients in verse 60 of the Surah Taubah. The Arabic text of the verse along with its translation is as follows:

“The Sadaqat (prescribed alms) are (meant) only to be given to the poor, the needy, to those employed to collect them, to those whose hearts are to be won, in the cause of the slaves and those encumbered with debt, in the way of Allah and to a wayfarer. This is an obligation prescribed by Allah. Allah is All Knowing, Wise.” (60)

There is a consensus amongst the jurists that the disbursement of Zakat is solely confined to these eight recipients. The Holy Prophet وﺳﻠﻢ ﻋﻠﻴﻪ اﷲ ﺻﻠﻲ was once asked by a Companion to give the latter Zakat. The Holy Prophet اﷲ ﺻﻠﻲ وﺳﻠﻢ ﻋﻠﻴﻪ replied:

“Allah has not assigned the right to distribute Zakat to any Prophet or any body else. He Himself has ordered about it and has fixed eight categories (of recipients). If you qualify as being from amongst these, I will give you your right.”

In the following lines, each of these eight categories have been described briefly.

The eight categories of Recipients of Zakat

1, 2) The poors, the needy (Fuqara and Masakeen)

The Fuqara and Masakeen are extremely poor persons. The eligibility of receiving Zakat under this category is restricted to either of the following three kinds:

  1. Those who do not own any property or assets at all, or
  2. Those who do not own any property or assets in excess of basic necessity (For e.g. House, furniture and effects, personal clothing, servant, tools of trade), or
  3. Those who own property in excess of basic necessity, but the excess is below the value of nisaab.

These three kinds of people can receive Zakat and they are also not obliged to pay it. However, it must be kept in mind that the above mentioned three kinds are different from the following two classes:

  1. Those who own, in excess of basic necessity, property or assets on which Zakat is levied (such as gold, silver, cash, inventory) whose value after deduction of debts, equals or exceeds the value of nisaab. They are obliged to pay Zakat, and cannot receive
  2. Those who own, in excess of basic necessity, property or assets on which Zakat is not levied (such as diamonds, land which is not purchased for trade, etc) which equals or exceeds the value of nisaab. They are not obliged to pay Zakat but at the same time, cannot receive it.
  • Collectors of Zakat (Al-‘Aamileen)

Al-‘Aamileen are those persons who are appointed by the Islamic State, or Muslim ruler, for the purpose of collecting Zakat. Zakat can be given to them as the salary for their efforts in collecting Zakat, even when they are Sahibun Nisaab or rich.

In regard to the rest of the seven categories of recipients, need is defined as a requirement and a rich person cannot be a recipient of Zakat. This is not the case with Al-‘Aamileen because the head of the Islamic State is responsible for the needs and welfare of the poor within his jurisdiction. He is therefore deemed to be their agent.

The Al-‘Aamileen, as employees of the head of state, are likewise agents of the poor and needy. It follows that the Zakat obligation is discharged as soon as the Zakat is paid by the Zakat payers to the Al-‘Aamileen. And the salary given to them is as if, given by the poors themselves. It is exactly like the case when a person, who is eligible to receive Zakat, hires an attorney and pays his fee from the Zakat he received.

  • Those whose hearts are to be won (Al-Mu’allafatu-Al- Quloob)

This category of recipients refers to the poor and needy Muslims (Fuqara and Masakeen) who are given Zakat for the express purpose of strengthening their hearts and making them more inclined towards the Islamic practices. Non-Muslims are excluded in accordance with the general principle that they do not qualify as recipients of Zakat.

  • The cause of (freeing) the slaves (Ar-Riqaab)

The word Riqaab is the plural of Raqabah, which literally means “neck”. In Arabic usage, it is taken as a whole person, therefore refers to a slave.

The majority of the jurists are of the view that the word Raqabah mentioned in the verse is confined to the Mokatab. Mokatab is that slave who enters into a contract with his master in terms of which, the latter undertakes to free him against payment of a fixed sum of money. The view of the majority of the jurists is for the reason that in paying Zakat, the recipient must be made owner of the Zakat property. In addition, Zakat cannot be paid as consideration for services rendered on the part of the recipient.

In the case of disbursing Zakat to free a slave, the master becomes the owner of the Zakat in return for the slave’s freedom. The slave himself cannot own property for want of legal personality. On the other hand, payment of Zakat to the Mokatab makes the latter owner thereof.

  • Debtors (Gharimeen)

The word Gharimeen is the singular of Gharim. It means debtor. The verse refers to a specific type of debtor, i.e. the one who is poor. A debtor can only be said to be poor and thus eligible to be the recipient of Zakat if his net assets (the difference between his assets and liabilities) is below nisaab.

 The way of Allah (fi Sabilillah)

All interpretations narrated by the Sahabah1 and Tabi’een2, regarding the word fi sabilillah, have expressively defined this word as either for Mujahideen or for pilgrims of Hajj. Imam Ibne Jarir and Imam Ibn e Kaseer, who restricted themselves to interpret the verses of the Holy Quran in the light of Ahadeeth, have particularized the word sabilullah with those Mujahideen and pilgrims of Hajj who do not have enough resources to perform their respective deeds.

On the other hand, some Muslim Jurists such as Allama Kasani, have generalized the interpretation and extended the meaning of sabilullah to all good acts enjoined by the shariah. However, these Jurists have specifically described that the recipients must be poor and needy persons. Therefore, the jurists are unanimous on the point that Zakat cannot be spent on projects that would promote the interests of and be beneficial to the Muslim Community e.g. building of hospitals, roads, bridges and the like.

  • Wayfarer (Ibn-us-sabil)

 This category refers to a traveler who, despite being wealthy at his place of residence, is in need during his journey. It is permissible to give such traveler Zakat to the extent of his needs. It is not permissible for such traveler to take Zakat in an amount which exceeds his needs and requirements. It is preferable for such traveler to borrow funds if he is able to do so than to accept Zakat.

Some Important rules relating to the recipients of Zakat

  • If someone owns cash, trading assets, gold and silver equivalent to the value of 612.36 grams of silver, he/she is considered as wealthy in Shari’ah, hence not eligible to receive
  • If someone owns, in excess of basic necessity, an asset or property on which Zakat is not levied (such as diamond, vacant land – not for commerce) and the excess is equivalent or above the value of 612.36 grams of silver, he is also considered as wealthy in Shari’ah. He cannot receive Zakat but at the same time, is not obliged to pay Zakat.
  • If one has cloths or crockery that are not used for years but for once or twice, then these cloths or crockery will be considered as an excess of basic necessity. Hence if its value is equivalent or above the value of nisaab, the owner cannot receive
  • The house in which one lives, the household furniture, servants, personal clothing and a motor vehicle, all are basic necessities. The owner of all these assets will not be considered as wealthy, no matter how expensive the assets are. Rather he is entitled to receive Zakat, if he does not have any zakatable asset equivalent to the value of nisaab.
  • If a person has given some of his houses on rent and he does not have any assets on which Zakat is levied, he can receive
  • If a person has 20,000/- Rs. and he is indebted of 20,000/- Rs., he can receive Zakat. If, in the above case, he is indebted of less than 20,000/- Rs., then if the balance is equivalent or above to the value of nisaab, he cannot be given Zakat. And if the balance is less than the nisaab, he can be given
  • Zakat cannot be given to a minor child of a rich person because such minor is deemed to be rich by virtue of the wealth of his father. If the child is major and needy, Zakat may be given to him irrespective of the financial standing of his parents.
  • Zakat can be given to a minor child whose father is not rich, but his mother is rich and wealthy because, a minor child is not considered rich by virtue of the wealth of his mother.
  • Zakat can be given to a poor woman whose husband is rich. Similarly, it is permissible to give Zakat to a poor person whose child is rich.
  • There is consensus of the Muslim jurists that it is not permissible to give Zakat to non-Muslims. Other forms of voluntary charity (sadaqah naafilah) may be given to them.
  • Zakat cannot be given to the children of Banu Hashim. These are descendants of the Prophet’s family (i.e. the descendants of Hazrat Ali رضہ, Hazrat Ja’far رضہ, Hazrat Aqeel رضہ, and Hazrat Harith ibn Abd Ul Muttalib) and are commonly known as Sayyids.

Zakatable Assets

 Allah Ta’ala has put the most minimum burden of monetary obligations on Muslims so that paying Zakat becomes convenient for every sahib-un-nisaab Muslim.

Firstly, it is not obligatory to pay Zakat on every asset. Rather only those assets are the subject matter of Zakat that have the potential of growth or increase. These assets may be broadly classified as follows:

  • Trading assets
  • Cash & Cash Equivalent (like prize bonds, Travelers Checks etc)
  • Gold and silver
  • Livestock (goats, sheep, cows and camels)
  • Agricultural

The principle governing the levy of Zakat is that only those assets are zakatable, which fall within the definition of money, like silver and gold. All other assets are not zakatable unless they are meant for trade and resale.

 Secondly, only the balanced value of these assets at the end of the year is the subject matter of Zakat. No Zakat is obligatory on the amount spent over the whole year.

General conditions for all zakatable assets

  • Ownership

The subject matter of Zakat must be in the complete ownership of the payer. If someone possesses an asset but does not own it, Zakat is not liable on it.

2- Potential of growth

The asset must have the potential of growth as the word Zakat itself means “Growth” or “Increase”.

3-Asset must be in excess of basic necessity

The subject matter of Zakat should be other than the basic necessities of a person. So the assets included in the basic necessities e.g. crockery, furniture, car etc are not the subject matter of Zakat provided that these assets are not purchased with the intention of sale.

4-One year must elapse over the asset

It is necessary that one year elapses over the asset which is subject to Zakat.

It means that possession of nisaab value should be both at the beginning and end of a lunar year. It is not necessary that a complete year passes on every single rupee. Rather, when a person is sahib-un- nisaab in the beginning and the end of the year, then he will be considered as sahib-un-nisaab and the fluctuating amount during the year will not be considered as the subject matter of Zakat.

 A detailed clarification of the highlighted portion is as follows:

If some one acquires a property before the completion of his Zakat year and he is the owner of the wealth above the value of nisaab, then one of the following situations may arise:

  1. The addition during the year is not the same kind or category as the existing property. For example, a person has gold or silver and thereafter during the course of the year acquires sheep.
  2. The addition is of the same kind or category as that of the existing property. This addition may be derived from the existing property, for example, profit arising during the year from sale of trading stock; or acquired from another source, for example, a person has cash and thereafter during the year acquires further cash by way of

In case ‘a’, the year for the gold or silver and sheep will be calculated separately.

However, in case b, the subsequent acquisition will be added or joined to the existing property for Zakat purposes and the Zakat for both will be paid together at the end of the Zakat year for the existing property. In other words, Zakat years will not be calculated separately for each subsequent acquisition in case ‘b’.

It should be kept in mind that if the subsequent acquisition is made after the expiry of the Zakat year, then a new year will be calculated. Similarly, if the existing property is below nisaab, the subsequent acquisition cannot be added to the existing property.

5Asset must be equivalent to Nisaab

Zakat is not levied on total assets if they are below the level of Nisaab.

Amount of Zakat

The amount of Zakat payable is two and a half percent (2.5%), or 40th portion of:

  1. the value of gold and silver if it is equivalent to nisaab or above
  2. trading stocks, or its value at the time of obligation of payment of Zakat, if the stock is equal to nisaab.
  3. cash on hand if equal to nisaab.

Zakat on gold and silver

  • Gold and silver are subject to Zakat regardless of whether they are owned for personal use or otherwise if the weight thereof equals the prescribed nisaab and one year elapses thereon. Gold and silver are also always liable to Zakat irrespective of the asset type (gold bar, jewellery, ingot, coin )
  • Zakat is not payable on any other kind of jewels, gems or precious stones, such as diamonds, rubies etc. If these metals are, however, acquired for business, then Zakat will be payable thereon as they would then constitute trading stock
  • If gold or silver is not pure, and some other commodity (such as copper etc) is added to it, then if the major portion of the element is of gold or silver, it is considered as gold or silver respectively and Zakat will be obligatory on it. And if gold and silver is in minor proportion, then it is not considered as gold or silver and no Zakat will be obligatory provided that it is not purchased with the intention of sale.
  • If a person has some gold and silver and the independent amount of both of them does not reach nisaab, then if the combined value of gold and silver reaches nisaab of silver, the accumulated worth will be the subject matter of Zakat. And if the combined value of gold and silver does not reach nisaab of silver, Zakat is not obligatory.
  • If gold and silver reaches nisaab independently, then valuation of the combined value is not needed. Rather, in this case, Zakat of gold and silver will be paid independently from the other.
  • Someone has a complete nisaab of silver. He got some more silver or gold before the year completed. Zakat of that additional silver or gold will be obligatory alongwith the completion of the year of the already owned silver and gold i.e. no additional or a complete year is required for Zakat being obligatory on that additional gold and silver. For example, the Zakat year of a person ends on 1st Ramadan. On 25th Shaban he has some gold and silver of the value of one hundred thousand rupees (Rs. 100,000/-). On 29th Shaban, he purchased additional gold valued two hundred thousand rupees (Rs. 200,000/-). Now on 1st Ramadan, the value of zakatable gold and silver of that person would be three hundred thousand rupees (300,000/-).
  • A person has cash equivalent to the nisaab of silver. Some amount of more cash is achieved before the completion of the year. Then the added amount of cash will be deemed as subject matter of Zakat after completion of the year of the previous

Zakat on cash

  • Cash is fully subjected to Zakat. It includes bonds, travelers’ cheque, and other cash equivalents.
  • If a person has cash equivalent to 87.48 gm of gold or 612.36 gm of silver, Zakat is obligatory on him, for cash comes under the same ruling as gold and silver in terms of paying Zakat.
  • If a person has some amount of cash, some gold, and some silver and neither of the three individually reaches nisaab, then the value of gold and silver will be added to the amount of cash, and if the combined amount reaches nisaab, Zakat is obligatory. If the combined amount does not reach nisaab, no Zakat is to be paid.
  • A person has cash equivalent to nisaab. He got some more cash a few days before completion of year. This more amount of cash will be subject to Zakat after completion of the year of previous amount of Cash. For example, the Zakat year of a person ends on 1st of Ramadan. He has Rs. 30,000/- on 28th of Shaban. On 29th Shaban, he receives Rs. 5000/- more. Now the zakatable cash of that person on 1st of Ramadan would become Rs. 35,000/-.

Zakat on trading assets

Zakat is payable on trading stock if their market value is equal to or more than the value of nisaab.

Definition of trading assets

 Trading assets are those, which are purchased with the intention of resale or capital gain. Consequently, goods that have been purchased for personal use and not for the purpose of trade are not subject to Zakat, irrespective of their value. Similarly, goods (other than gold and silver) originally bought for personal use are not subject to Zakat if the purchaser subsequently intends to sell them for trade and had not intended it at the time of purchase. Once sold, however, their sale price would be subject to Zakat.

Likewise, a person may purchase goods for personal use with the intention that if he is able to obtain a profit thereon, he would sell the goods  in which event, no Zakat is payable on such goods. On the other hand, if an asset is not purchased and is owned by some other means e.g. inheritance or gift, then the asset will not become the subject matter of Zakat.

In short, trading assets are those that are:

(ii) Purchased

(iii) Purchased with the intention of sale.

If any of these two conditions is missing, the asset will not be treated as a trading one and thus will not be subjected to Zakat.

Following are some situations relating to Zakat on trading assets:

  1. Nisaab of trading assets is same as that of cash i.e. if the value of the assets reaches the value of 87.48 gm of gold or 612.36 gm of silver, then Zakat is obligatory after the completion of Zakat
  2. If a person has a house that is leased, the value of the house will not be subject matter of Zakat, as leasing a property does not render it a trading asset. However, the rentals received will be the subject matter of Zakat
  3. Since the machines in the industries are not trading assets, therefore no Zakat is obligatory on them. However, if they are purchased with the intention of resale, then Zakat will be obligatory.
  4. The products manufactured in an industry, as well as the raw material, are subject matter of Zakat
  5. If a person has some trading assets that do not reach nisaab, and then if he has some other zakatable assets such as gold, silver and cash, and the combined value of all zakatable assets reaches the value of 612.36 gm of silver, then Zakat is obligatory.
  6. It is permissible for the Zakat payer to estimate a bulk price of the trading assets i.e. the market value of the stock–in-trade if sold in bulk at the end of the Zakat year, for purposes of calculating Zakat.

Zakat on Shares

 If shares are purchased with the express intention for resale or capital gain, then the entire value of the shares is subject to Zakat.

If, however, the shares are purchased with a view to holding them as an investment and receiving the dividend income, then the following must be borne in mind.

ownership of a company’s shares confers undivided ownership in the underlying assets of the company. The holder is a proportionate owner of the business. All business assets can be classified into two types for the purpose of Zakat.

  1. Fixed Assets e.g. Machinery, buildings, Furniture
  2. Current Assets e.g. cash, stock in trade, receivables

Fixed assets are exempt from zakat whereas, current assets are subject to it. The owner of the shares can deduct from the Zakatable value a proportion equivalent to that of the liabilities and the fixed assets of the company. In other words, it is permissible for the owner of the shares in this case that he does not take into account the liabilities and non- zakatable assets such as plant and machinery etc. The way to ascertain the proportion of zakatable assets to non-zakatable assets of a company is to consult the balance sheet and profit and loss account. These documents are available as part of the company’s annual report.

Zakat Payable (Z.P) = [Total Assets (T.A) MINUS Fixed Assets (F.A) MINUS Total Liabilities (L)] DIVIDED BY Total No. of Shares outstanding (S.O) MULTIPLIED BY 2.5%.

i.e.

Z.P        =                (T.A – F.A – L) x   2.5

S.O               100

The above mentioned detail is for the one who has the ability and resources to ascertain the exact amount of zakatable assets represented by the shares. However, if the calculation gets complicated for somebody, then he should consider the entire value of the shares as his zakatable asset and thus pay Zakat for it.

Summary

For a common person (one who is not involved in livestock or agriculture) all that needs to be taken into account for Zakat calculation is the following:

The amount of cash owned (be it on person, in the bank, or loaned out. This can be money earned or income from additional house, properties etc.) as well as the value of any gold or silver jewelry owned, (necklaces, watches, etc. but not the gems or stones within them), and also, if one is involved in trade, then the value of one’s stock/merchandise at that time constitutes one’s accountable total.

Debts owed to others should be calculated too and then deducted from the total zakatable assets.

Intention (Niyyah ﻧﻴّﺖ) of Zakat

The intention to give Zakat is a prerequisite for the discharge of the Zakat obligation (as in the case of Salaat and Saum). In the absence of such intention (whether due to ignorance or forgetfulness), the Zakat obligation is not discharged and the amount paid over to the recipient will deemed to be Nafl sadaqah.

The requirement of an intention to fulfill Zakat is necessary in order to distinguish payment of Zakat from other forms of compulsory and voluntary payments to poor and needy persons.

Following are some situations relating to the intention of Zakat.

  1. The Zakat obligation is discharged if the intention is made at either of two points of time: (a). at the time of giving Zakat; or (b). at the time of separating and setting aside the Zakat amount for distribution. In this case, the Zakat would only be discharged if the physical transfer to the needy recipient is made.
  2. If a person gives an amount of money or property to a poor and needy person who does not own nisaab, and fails to make any intention at the time of such payment, but thereafter makes an intention of Zakat, then: (i) if such property or money is still in the hands of the poor and needy person, the Zakat obligation will be discharged; (ii) if the property or money is no more in the hands of the poor and needy person, the intention so made does not suffice and the Zakat obligation is not discharge.
  3. If the Zakat payer or owner pays the Zakat amount to an agent for distribution to the recipients entitled and makes the intention at the time of such payment to the agent, then the Zakat obligation will be discharged if the agent gives Zakat to the poor without any intention on his part. This is because the intention of only the Zakat payer, and not that of his agent, is relevant for purpose of payment of Zakat
  4. A person pays the Zakat of another from the latter’s property and without his permission, and thereafter such owner sanctions the payment. In such a case, if the amount paid is still in the hands of the needy recipient, the Zakat obligation is If not, the Zakat. obligation will not be fulfilled and the payment will be in lieu of nafl sadaqah.
  • A person gives an agent an amount of money for distribution as voluntary charity (nafl sadaqah). Prior to payment thereof by the agent to a poor and needy person (faqir), the owner makes an intention that the amount so given should represent Zakat in which event if such amount is thereafter given to the poor then the Zakat obligation would be discharged.

The principles of At-Tamleek

 means the transfer of ownership of Zakat from the Zakat payer to a poor and needy person. It is, in the context of Zakat, subject to the following conditions:

  1. The transferor must be the Zakat payer (or his agent).
  2. The transferee (or recipient) must be a natural person entitled to receive Zakat in terms of the eight categories of the recipient of Zakat.
  3. The transfer of Zakat must be unconditional
  4. The transfer of Zakat must not be a consideration for services rendered by the recipient
  5. The transferee (or recipient) must acquire physical possession of Zakat and thereby becomes the owner therefof.

If these conditions are not met, as for the instance where Zakat is paid as salary or used for building a mosque, the Zakat obligation is not discharged.

There is consensus amongst all the four schools of thought that Zakat cannot be used for public welfare projects. The position is summarized by Imam Abu Ubayd Qasim Ibn Sallam, is as follows:

In relation to paying the debts of a deceased person, or paying his burial expenses, or building a mosque, or digging a stream, similar public welfare schemes- Hadrat Sufyaan Thuri, and all the Ulama of Iraq and other Ulama are unanimous on the point that these works cannot be undertaken with Zakat money because they are not included in the eight categories of recipients mentioned by the Qur’an.

Agency and Zakat

One is not obliged to distribute the Zakat by himself to the entitled recipients. He may validly appoint an agent (whether natural person or organization) to pay the Zakat on his behalf.

In appointing such an agent, the Zakat payer must bear in mind that the Zakat obligation is not discharged if the agent fails to distribute the Zakat to the entitled recipients. At the same time, possession of the Zakat amount by the agent will be deemed to be possessed by the principal (Zakat payer) as in the case of those organizations, who are guilty of serious maladministration by collecting Zakat and not distributing the same for a number of years without valid reason.

It follows that the Zakat payer must exercise utmost care in appointing an agent who must be both trustworthy and also conversant with the laws of Zakat.

The agent, unless instructed to the contrary, may validly give Zakat to his wife and children if the latter do not own nisaab. On the other hand, the agent himself cannot take Zakat unless he has the express authority to do so. For example, he may take Zakat if the Zakat payer gives him a mandate in the following terms: “Pay Zakat to whomsoever you wish”.

Zakat on the employees’ provident fund

If the salary of the employee is deducted at source, without giving this amount to the employee, Zakat is not payable on the amount kept in the Employees’ Provident Fund, until the employee receives the same. When an employee receives it on his retirement, the amount so received shall form part of his zakatable assets of that year only, and such part of it, that is not spent before the valuation date, shall be subject to Zakat, and Zakat will be payable on the aggregate balance of his assets (including the balance of the amount received from the Fund) on the valuation date.

If, on the other hand, the employee first receives this amount and then with his own intention, puts this money in the provident fund, then this money will become the subject matter of Zakat. And Zakat will be obligatory for all the years in which the money is kept in the fund.

In other words, the amount received from the Provident Fund must be held for one year before Zakat is payable thereon. If the recipient has existing zakatable assets equal to nisaab, then the amount received from the Provident Fund will be added thereon and the whole amount, or the balance remaining (in case of expenditure) will be subject to Zakat of the next valuation date. For example, the Zakat payer’s valuation date is 1st day of Ramadaan each year, and he receives the lump sum from the Provident Fund two months before that date. The lump sum will be added to his existing nisaab, and he will pay Zakat thereon on his valuation date next, namely, 1st day of Ramadaan.

Zakat to the charitable hospitals

If Zakat is paid to a charitable hospital, certain arrangements must be followed otherwise Zakat will be void.

Every Zakat deserving patient should appoint the management of the hospital as his agent to receive Zakat and spend it on procurement of the medication and paying cash against other expenses incurred against his treatment. This can be done through filling a form before the treatment of the patient.

If a charitable hospital follows this arrangement, Zakat can be given to it. Otherwise, in the case where no agency agreement is made, Zakat will be void.

An example of calculation of Zakat

A person ‘X’ is a manufacturer of clothing. He has the following assets and liabilities at the end of the Zakat year.

Assets Amount
1. House 2,000,000
2. Furniture & Household Effects 25,000
3. Motor Vehicle 600,000
4. Gold 100,000
5. Diamonds 50,000
6. Cash 1,500,000
7. Stock-in-trades 1,000,000
8. Machinery 500,000
9. Receivable from others 800,000
10. Vacant Land 800,000
Liabilities Amount
11. Bank overdraft 50,000

 

12. Trade creditors 500,000
13. Loans 700,000
Total Liabilities 1,250,000
Calculation of Zakat

Assets subject to Zakat

1. Gold

 

 

100,000

2. Cash 1,500,000
3. Stock-in-trades 1,000,000
Total 2,600,000
Less Liabilities 1,250,000
Balance 1,350,000
Two and a half % of 1,350,000 is 33,750
Hence X is obliged to pay 33,750 as Zakat.

 

Notes

1, 2 and 3: the house, furniture and fittings and motor vehicle are not subject to Zakat unless they are purchased for trade.

4: Gold is subject to Zakat whether for personal use or otherwise.

5: Diamonds, precious stones and metals are not subject to Zakat unless acquired for trading purposes. The same applies to all metals other than gold and silver.

6 and 7: Cash and stock in trades are subject to Zakat by consensus of jurists, because they are assets capable of growth through commerce and economic activity.

8: Machinery is a means of production which depreciates in value over time and is not an asset capable of growth. Hence, they are not subject to Zakat.

9: Account Receivables from others are subject to Zakat but the obligation to pay Zakat thereon only arises upon receiving of the debts in question in which event, the Zakat of preceding years must also be paid on such debts.

10: Zakat is not obligatory on land unless acquired for trade. Even if they are purchased for rent, Zakat is not obligatory.

11, 12 and 13: These debts must be deducted because the assets of the debtors are correspondingly exposed to the claims of creditors, according to Hanafi Law. However, if the mortgage bond or bank overdraft or other long term liability is of such a large amount so as to nullify the Zakat liability then such debts must not be taken into account according to Shafi law.

Zakah Calculator

Date of calculating Zakat     …../…./……

 

Assets Totals
For Example Your own Case
Cash in hand 10,000
Total amount deposited in Banks 20,000
Account Receivables 10,000
Rental income accrued 5,000
Net Asset value of Bonds 25,000
Total value of Saving certificates 30,000
Market value of Gold & Silver (total) 40,000
Present value of the property (that is purchased for the purpose of resale)  

100,000

Inventory (Trading Goods) 50,000
Raw material and work in progress 20,000
Finished Goods 30,000
Shares (that are purchased for trade)1 40,000
Total Assets 380,000
Liabilities Totals
Total Amount/Accounts/Notes payable 100,000
Unpaid Rentals 10,000
Unpaid Salaries 20,000
Any other Dues (For e.g. Unpaid tax, utility bills etc.) 10,000
Total Liabilities 140,000
Total Assets – Total Liabilities = Net Assets * 2.5% = Zakat Payable 6,000

 

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