Zakat - your guide to the correct calculation

20.04.2022|Islamic Finance
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Just as a healthy tree must be pruned to grow strong and thrive, so too must our wealth be purified through Zakat. Paying Zakat cleanses our wealth and blesses our prosperity and livelihood. The distribution of Zakat from the wealthy to the needy connects our economic well-being with spiritual fulfillment. Whether you are just starting your Zakat journey or have been giving Zakat for years, there are many questions about Zakat.

1. What is Zakat and why is it important?

Understanding Zakat is essential for managing your wealth in an Islamically compliant manner.

Also known as the poor-due, it is one of the five pillars of Islam and a religious duty for Muslims.

The obligation to pay Zakat is mentioned in numerous places in the Quran.

In Surah Al Baqara, Aya 43, it says: "And establish prayer and give Zakat and bow with those who bow [in worship and obedience]."

Surah Al Maarij, Aya 24-25, describes Zakat as a "recognized right" for the needy and the deprived.

Introduced during the lifetime of the Prophet Muhammad (PBUH), it remains a crucial support for the social and economic welfare of the Ummah.

The Arabic word Zakat means both "to purify" and "to grow". By paying Zakat, Allah purifies and increases your wealth.

In Surah Al Baqara, Aya 245, the giver is described as someone who "lends to Allah a good loan" which He will multiply many times over.

Thus, paying Zakat is a form of investment.

You fulfill your duty to Allah, give from what He has provided you, show gratitude, and hope for His reward and mercy.

In Surah Al Baqara, Aya 277, it is said, "Those who give Zakat will have their reward with their Lord."

So, Zakat is both a duty and an opportunity, allowing you to do good and earn rewards in this life and the Hereafter.

2. Who pays Zakat and to whom?

Every adult Muslim whose wealth reaches the Nisab threshold is religiously obliged to pay Zakat. It is collected and distributed to the poor, needy, indebted, and four other specified groups. Ideally, it is used locally, but in exceptional cases, it can be distributed outside one's community.

Turn to trustworthy institutions or charities that specialize in collecting and distributing Zakat. To fulfill the Zakat obligation, your contribution must reach the recipients designated by Allah and not be used for other purposes or projects.

3. When, how much, and how often is Zakat paid?

If your wealth meets the Nisab threshold, you as an adult Muslim are required to pay 2.5% of it as Zakat. Different rules and rates apply to agricultural produce or livestock, which you can determine as needed. Zakat payers set a specific date to calculate and pay their annual Zakat (lunar year: 354 days).

4. What is Nisab?

Nisab is the minimum amount of wealth that makes one liable to pay Zakat. This is 85 grams of gold or 595 grams of silver. Today, you can convert the current gold value into your currency to determine the Nisab.

The current Nisab in 2022 is approximately: 4,820.00 Euros (85 x current gold price per gram).

As an owner of an INAIA Gold account, you can check the current gold price anytime and calculate the Nisab yourself.

5. Do I have to pay Zakat despite having debts?

Yes, but you deduct debts that arise within your Zakat year from your Zakatable wealth. The full amount of a mortgage or long-term debts should not be deducted according to some scholars.

Your Zakat calculation is done in two steps:

  1. Zakat base amount = Zakatable wealth + lent money + gold or silver - debts
  2. Zakat = 2.5% of the calculated Zakat base amount (only if Nisab is reached)

6. Why is Zakat set at 2.5%?

The basis for calculating Zakat was established by the Messenger of Allah (PBUH).

The source is an Islamic tradition (Hadith):

Ali reported that the Prophet (PBUH) said: "When you have 200 Dirhams at the end of the year, five Dirhams are due as Zakat. For gold, nothing is due until you have 20 Dinars. When you have 20 Dinars at the end of the year, half a Dinar is due as Zakat. Any additional amount is calculated similarly. No Zakat is due on money until it has been in your possession for a year (lunar year: 354 days)." [Abu Dawud]

All essential components for calculating Zakat are mentioned in this tradition.

  1. If you have 200 Dirhams (silver) for a year (lunar year: 354 days), you pay 5 Dirhams Zakat. This corresponds to 2.5%
  2. If you have 20 Dinars for a full lunar year, you pay half a Dinar Zakat (2.5%)
  3. If your wealth is lower, no Zakat is due
  • 1 Dinar = 4.245 grams of gold
  • 20 Dinars = 85 grams of gold
  • 1 Dirham = 2.975 grams of silver
  • 200 Dirhams = 595 grams

Zakat Calculator

To calculate your Zakat, you can enter your information into an online Zakat calculator to determine the amount due. Here are two free online Zakat calculators available:

7. What types of wealth are included in the Zakat calculation?

Traditionally, the following assets are relevant for Zakat calculation:

  • Gold and silver
  • Cash and bank balances
  • Stocks and investment funds
  • Lent money
  • Merchandise and business inventories
  • Agricultural products (5% - 10% Zakat)
  • Livestock such as cows, goats, sheep (different Zakat rates and rules apply)

Today, it is a challenge to determine which assets are subject to Zakat and which are not due to the variety of financial products. The intention behind acquiring an asset is crucial for distinguishing between them.

Acquisition for personal use

Your home, a car, clothes, food, drink, and any personal belongings you buy, use, or consume. This capital is your personal property and not subject to Zakat (except for cash, gold, and silver). There are differing opinions on whether personal gold and silver jewelry are subject to Zakat. We recommend including them in your Zakat calculation if their value reaches the Nisab.

Acquisition for investment purposes

This is divided into:

  • Investments for value preservation: You buy property, land, or collectibles not to sell them for profit but to preserve the value of your money long-term.
  • Investments for income generation: You buy property to rent out and generate ongoing income. You buy stocks or securities to earn dividends.

If your investment is not for business purposes, its value is not relevant for your Zakat calculation. However, you pay 2.5% Zakat on the annual profits (lunar year: 354 days) generated from renting it out, provided you have reached the Nisab.

Acquisition for business purposes

If you are an entrepreneur, property trader, shop owner, or engage in any form of business, you buy goods to sell them for profit or raw materials for producing new goods. All items intended for resale are considered in the Zakat calculation, including inventories and unfinished products and raw materials.

The following overview shows which financial products you pay Zakat on: