This article is Part 4 of an ongoing series titled, 'Zakat Made Easy'
Zakat on Cash and Liquid Investments
All cash and liquid assets that a Muslim possesses, irrespective of where they are held, are zakatable.
Cash or liquid investments obtained from gold, silver, modern fiat currencies, and cryptocurrencies are all zakatable. Other related entities in this category include free range grazing goats, sheeps, cows, and camels and certain crop yields; referring to crops that are hardened or ripened and can be stored.
The general rule of thumb is that anything that grows is zakatable. But what happens if a person keeps adding more money to their savings or have gotten increments? This scenario can be assessed from two separate angles:
- If the “new money” is as a result of the initial invested money such as profits on an asset, then zakat becomes due on the entire amount when one year has passed on the initial amount. While calculating, both the initial and “new money” will need to be calculated, even if the “new money” has just been recently acquired prior — be it a few days or even hours prior to calculation.
- If the additional money does not originate from the initial source of invested money, but comes from another source of income, one must go back to the general rule which is: a separate year is needed to calculate for each amount of money. It is not necessary for this new money to reach the nisab, because the nisab has already been reached by the initial amount.
However, we realize that it may be difficult to manage point two if done on a monthly basis as it is easier to pay zakat during the year when the money first hits the nisab. This would be the safest and easiest calculation method.
In the context of money, zakat is applicable on all types of savings, irrespective of the intention of the saving — whether it’s to perform the Hajj, to buy a house, or even if the money is stashed away under one’s mattress for an emergency. All of these are zakatable as long as the nisab is met. Money that is earned through salaries, benefits, rental income etc. also falls under this category.
Irrespective of the form it exists in or the source that you attained it from, the amount of money that you hold on the day your zakat is due, is the amount you will need to pay.
Alternatively, money that cannot be controlled, accessed, profited or benefited from is removed from the calculation. This includes money that is lost or if the government freezes one’s bank account.
If a person is actively trading stocks, then they will use the market value of the portfolio on the day of calculation for zakat.
According to the Organisation of Islamic Cooperation (OIC) and International Islamic Fiqh Academy (IIFA), zakat is not obligatory on public money, endowments made for the sake of Allah, and money that is owned by non-profit charitable organisations.
Important: All interest (riba) that is earned from any form of investments should be given away to charity immediately, and one should not gain any benefit from it. And because accepting interest is haram, giving it away does not count as charity. Instead, it simply serves as a way for one to remove major impurities from themselves and their wealth. But who is this money given to?
Opinion 1 – To the eight Asnaf categories
Opinion 2 – To the fuqara and the masakin alone
Opinion 3 – For the public or social works that benefit society as a whole
Zakat on Security Deposits
In many places, tenants are asked to keep a specific amount as security deposit with the owner or someone in a similar capacity which is later returned if there are no damages to the house. If there are any damages, then the cost to fix them is deducted from the security deposit before giving it back to the tenant.
How is zakat calculated on this? Sheikh Ibrahim Nuhu said, “If you know for sure that you will 100% get back your money, you have kept the house in order such that there will be no deductions, the person is a person of honesty, and won’t charge you unnecessarily, then count it as part of your zakat calculations for the year.
But this is not usually practical. It would be best to pay zakat on the amount that the person receives whenever the period of tenancy is over and the x amount of money is returned as that is the actual money that would be called under his ownership. If it is below nisab then there is no zakat on the amount. If one wants, they can pay for the past years based on this as well. If someone was to include it in their zakat calculations as mentioned in the first case to remain safe, then that is acceptable as well.
Zakat on Debts – How does it work?
People who owe money must also pay debt and their debt is classified into two types:
- Good Debt: The debtor is willing to give the money back on time. This is considered good debt because the owed money is in one’s own hands. Zakat is to be paid by the creditor on this amount of money. In this scenario, the creditor can either pay zakat every year or all at once when the money has been returned to him.
- Bad Debt: The debtor is not willing to give the money back on time or at a foreseeable point in the near future. This individual has either outright rejected the notion of taking on debt or claim that they have no ability to pay back the debt. The creditor has to assess the situation and judge this case very carefully. In this situation, zakat is not needed.
However, these guidelines do not include outstanding wages, dowry, inheritance, or assets held in trust.
Our teacher, Sheikh Ibrahim Nuhu said, “Don’t be in a state of doubt with regards to debt. Pay it off as soon as possible without delay. Write it down so that it is known. The creditors have a right on the person before the heirs. Debt must be settled before the inheritance is distributed and it is even better if it can be settled before the person is buried.”
He goes on to say that, “There is no Riyal or Ringgit in the Hereafter. The only currency counted are good and bad deeds. 1 Riyal of the Dunya’s debt could be worth a mountain of good deeds in the Akhirah. What’s worse is that there’s no discount on that Day as everyone seeks to let go of their losses and make profits. Never let yourself enter such a situation knowingly and not do anything to pay it off immediately.”
“If you can’t trace the person you owe, find his family. If you can’t do that, then give away the owed money as charity. If the money is of a substantial amount then try making it as a sadaqah jariyah for him. But what if he comes later to claim the money? Then, you will have to give him back the money and the charity that was given in the past will be on your name.”
اللَّهُمَّ إِنِّي أَعُوذُ بِكَ مِنْ الْهَمِّ وَالْحُزْنِ وَالْعَجْزِ وَالْكَسَلِ وَالْبُخْلِ وَالْجُبْنِ وَضَلَعِ الدَّيْنِ وَغَلَبَةِ الرِّجَالِ
O Allah, I take refuge in You from anxiety and sorrow, weakness and laziness, miserliness and cowardice, the burden of debts and from being overpowered by men. [Bukhari]
How does Zakat on Gold, Silver, and Jewellery work?
This important category has been the subject of much contention, with varying opinions among scholars and the public in general, as many have long-held misconceptions about it.
The rule of thumb is that 2.5% of gold and silver must be paid as zakat if it has reached the nisab. This is equal to 20 mithqals of gold (85 grams of gold) and 200 dirhams of silver (595 grams of silver). Both elements can be combined to reach the nisab. But bear in mind that the calculation is reserved for pure gold and silver. If the gold or silver is mixed or impure, no zakat is due until the weight of the pure amount of gold and silver reaches the nisab.
How does one value the price of their gold or silver? One can check the price with the local jeweller and see what price they would give you were you to sell your gold or silver to them. Another method would be to get them to let you know the exact weight of gold or silver that you have and then calculate based on the market price of gold and silver at that particular time. This method might give you a slightly higher amount of zakat to pay, but this is indeed a safer option.
Many in the subcontinent use a different measure of calculation like tolas, boris, or voris instead of grams. 1 Tola is equal to 11.66 grams approximately. So one must own 7.2 tolas for it to meet the nisab.
The subject of gold that is worn by women as jewellery varies according to different madhhabs:
- According Imam Abu Hanifa and Imam Ibn Hazm, zakat is obligatory on all gold and silver that a person possesses irrespective of whatever form, and if it is worn or kept.
- But, Imam Malik, Imam ash-Shaf’i, and Imam Ahmad hold on to the belief that no zakat is necessary on women’s jewellery, regardless of its value and if it’s exempted, just as the house in which a person resides is exempted.
Let’s take a deeper look into two ahadith before proceeding further.
Amr bin Shu’aib on his father’s authority said that his grandfather reported: A woman came to the Messenger of Allah (ﷺ) and she was accompanied by her daughter who wore two heavy gold bangles in her hands. He said to her: Do you pay zakat on them? She said: No. He 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 (ﷺ) saying: They are for Allah and His Apostle. [Abu Dawud]
Narrated ‘Abdallah bin Shaddad bin Al Had: We entered upon Aisha, wife of the Prophet (ﷺ). She said The Apostle of Allah (ﷺ) entered upon me and saw two silver rings in my hand. He asked What is this, Aisha? I said I have made two ornaments myself for you, Messenger of Allah (ﷺ). He asked Do you pay zakat on them? I said No or I said Whatever Allah willed. He said this is sufficient for you (to take you) to the Hell fire. [Abu Dawud]
At first glance it may seem that both ahadith insinuate that zakat on jewellery worn by women is an obligation, but that may not be the case. Let’s see why:
The Messenger of Allah ﷺ did not enquire if a year had passed on this jewellery or if they even met the nisab. This is, as we discussed earlier, are the interchangeable usage of the terms ‘sadaqah’ and ‘zakat’.
A woman’s jewellery which is worn has been compared to the cows and camels that are used by a person—there is no zakat due on them despite the fact that they belong to a category of assets that is zakatable.
The Golden Chain: Yahya related to me from Malik from Nafi that Abdullah Ibn Umar used to adorn his daughters and slave-girls with gold jewelry and he did not take any zakat from their jewellery.
Imam Hassan al-Basri mentions that not paying Zakat on gold that is being used is the opinion of the 4 Khulafa ar-Rashidin and the majority of the scholars that include Imam Malik, Imam Shafi'i, and Imam Ahmad Ibn Hanbal.
Zakat is not required on permitted jewelry that is ready to be used or lent out. This is the position of our mother Aisha, the Hanbali madhab and other leading jurists. This stands even if she has bought them to wear it on special occasions, even if it is once in 2 years. Aisha used to take care of her nieces, who were orphans under her protection, and adorned them with jewelry without paying its zakat.
Imam al-Baihaqi narrates the case of Asma: “Asma’ bint Abu Bakr used to adorn her daughters with gold. Although its value was around fifty thousand dinars, she did not pay zakat on it.”
According to the madhab of Imam Ahmad, zakat is not obligatory for gold and silver jewellery that is owned or worn by women, even if she rarely ever uses it, for as long as she does not intend to trade it.
Zainab the wife of Abdallah Ibn Mas'ud said Allah’s Messenger addressed them saying,“You women should give sadaqah even if it consists of your jewellery [Tirmidhi]
Opinions of the scholars on zakat on gold and silver that are worn as jewellery by women
Imam Ahmad said, “This is the opinion of (at least) five of the companions. It is also the opinion of Imam Malik and Imam al-Shafi’i. All the narrations that suggest that zakat is obligatory in this matter are considered weak by most scholars as stated by Imam al-Tirmidhi, and assuming they are authentic, then most of the companions and scholars understood them to mean something else other than zakat.”
Imam Malik said, “Anyone who has unminted gold or silver, or gold and silver jewelry which is not used for wearing, must pay zakat on it every year. It is weighed and one-fortieth is taken, unless it falls short of twenty dinars of gold or two hundred dirhams of silver, in which case there is no zakat to pay.”
He continues, “Zakat is paid only when jewelry is kept for purposes other than wearing. Bits of gold and silver or broken jewellery which the owner intends to mend to wear are in the same position as goods which are worn by their owner–no zakat has to be paid on them by the owner. There is no zakat (to pay) on pearls, musk or amber.” [Muwatta Imam Malik]
Sheikh Abdul Aziz al-Tarefe said, “Zakāt is not obligatory on the used gold of women (jewellery), even if it is a lot, as long as it is worn, even if on certain occasions only. This is according to the correct view, and is the view of most of the companions and majority of the scholars.”
But what happens if the jewellery that we hold is a mixture of different metals? Well, zakat is only obligated on it if 50% or more of the metal is in the form of gold or silver. The zakat is calculated based on the weight of the gold or silver from the mixture.
Though it is not necessary, paying zakat on the jewellery that we possess—even if we are using it—is a sign that we are holding ourselves to a higher level of excellence. As long as it is within the financial capability of a person to do so, paying this additional zakat is an opportunity to attain the pleasure of Allah and help the poor in the society.
Two important points to remember from this topic:
While calculating the nisab for zakat, keep in mind that the price of precious metals stated online is typically listed per troy ounce, or 31.1035 grams. This is different from the standard, or avoirdupois, ounce, which is 28.3495 grams. Ensure that you do your own due diligence to avoid any erroneous info and produce incorrect results.
The nisab of gold and silver is based on the pure form of these metals. The amount of impurities or alloys is overlooked, and zakat is given on the pure gold. The minimum threshold for zakat on pure (24 karat) gold is 85 grams, and the fineness of this caratage is 999/1000. This is the highest level of fineness for gold, according to specialists in this field.
The minimum threshold in the case of 21 karat or 18 karat gold, and so on, is worked out in many ways, one of the most well-known of which is as follows:
The number of grams is multiplied by the caratage, then divided by 24. The resulting figure represents the pure, 24 karat gold. If that number reaches 85 grams or more, then zakat must be given on it, at the rate of 2.5%.
So if the gold asked about is 21 karat, for example, then its zakat may be worked out as follows:
(170 x 21) ÷ 24 = 148.75.
Then a person gives 2.5% of this number of grams, which is approximately 3.7 grams. This is the amount of zakat that must be given at the end of the Hijri year.
Other precious metals like diamonds, rubies, sapphires, platinum, corals etc. do not fall under the category of zakatable assets. That being said, one must not intentionally change their wealth into these metals just so that they can avoid paying zakat as Allah is aware of what we do or think of doing.
How does zakat on property and similar fixed assets work?
Do you have to pay zakat on the house that you are currently living in? No, zakat is not necessary for the house that you, your family or dependants are living in, and this includes multiple houses.
However, the rule on zakat may change according to the intention of owning or building a house. Zakat could, for example, be obligatory on other types of houses that a person might own. If the person owns a house that has been given out for rent, then zakat is due on it.
How is zakat on property that is rented calculated?
It is calculated based on the net rental income and not the gross rate income. This particular income is then added to the total wealth that the person has on the day their zakat is due, and 2.5% from that is given out as zakat.
If the building or fixed asset is used for business purposes, zakat is not due on the building or the fixed asset itself, but rather, on the business goods and the profits generated from the business or fixed assets.
If the building or fixed assets are purchased with the intention of reselling, then zakat is due on the entire value of the property. This could include property that is brought for development, refurbishment, and resale.
If someone buys another house as a form of investment, no zakat is due on it as it is considered a long-term investment. If the person, however, makes the intention to sell this property, it falls under the category of a zakatable asset because it is considered a trade good.
Zakat is not due on land that one has inherited or purchased with no particular intention as a store of wealth. But if the land is bought with the intention of sale and capital appreciation then zakat is due on the approximate sale price of the land every year.
We can clearly see the importance of one’s intention, when it comes to zakat. All in all, zakat on other fixed assets can be calculated after assessing a person’s use and the intention of purchase. Lands that are used for agricultural purposes, for rearing cattle etc., require individual assessment to determine the zakat.
How does zakat on business assets and liabilities work?
In order to better understand this subtopic, the three most important points of zakat calculation needs to be revisited again:
- Identify and calculate the total value of zakatable assets
- Subtract the total number of debts or liabilities, which gives us the total net assets.
- Compare the net zakatable assets to the nisab and pay zakat on it if it is equal to or more than the nisab.
But first, what exactly are considered as business assets? Business assets include all the cash that is held in the business, the value of finished goods, works in progress, raw materials, and strong receivables or debts that are owed to the business. All business assets need to be valued at their current market price. Finished goods are calculated based on the retail sale price, while unfinished goods are based on the price that those goods or components would sell for on the day you are calculating your zakat.
Overheads and operational assets have no zakat due on them. This includes factory buildings, warehouses, IT equipment etc. So at the end of the day, all that matters are items that are either ready to be sold or will eventually be ready to be sold.
Of course, there might be other assets that a person owns, but that ruling will be completely dependent on the intention of the person who has purchased this asset. An asset bought with the intention to sell will be subject to zakat as it is then considered a tradable asset.
For example, a person could have bought a house with the intention to sell, but now wishes to live there instead—the change of intention also changes the asset from the category of a zakatable asset to the category of a non-zakatable asset.
But what exactly are liabilities? Liabilities are legally binding obligations that are payable to another person or entity. In simpler words, liabilities are something that a person or a business owes to another, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services.
For liabilities that have already been incurred and their value is known or fixed and are due for payment, the value can be deducted. This concept is similar to taxes. Taxes are generally deducted at the end of the financial year and this might be after the annual due date of the person’s zakat.
Unpaid tax during the previous financial year can be deducted from one’s cash balance prior to calculating the zakat. Despite this, money that is being saved to pay off taxes for the current financial year cannot be excluded from this year’s zakat calculation. Why is that? The reason is because the tax liability for the previous year is now known and it cannot be changed. But tax for the current financial year is not known explicitly and is not due to be paid.
The non-interest portion of any debt in a business that is to be repaid in the next year can also be deducted from the zakat calculation. But this should only be done, if it makes repayment a burdensome option. Any debts or liabilities will be deducted from the business assets and the net value will be included in the zakat calculation.
Who pays zakat for the business? Business owners pay zakat on the business in proportion to their percentage of ownership.
Here’s an example:
Assume X owns 60% of the business and Y owns 40% of the business and the value of the zakatable assets is 1 million. They have liabilities of 200,000. So the net zakatable assets are 800,000.
2.5% of the net zakatable assets value is 20,000. Based on the percentage of ownership, X pays a zakat of 12,000 and Y pays a zakat of 8,000. This zakat can be paid from the cash of the business or from their own personal cash as well.
Narrated Samurah ibn Jundub: The Messenger of Allah (ﷺ) used to order us to pay the sadaqah (zakat) on what we prepared for trade. [Abu Dawud]
Seikhul Islam Ibn Taymiyyah said, “The 4 Imams, together with the entire body of Muslim scholars except few individual scholars, unanimously agree that it is obligatory to give zakat on trade goods. This ruling applies to any merchant, whether resident or travelling, a monopolist merchant or a shopkeeper.”
“It also applies to any type of goods such as clothes, food, utensils such as pottery and the like, or any types of animals including horses, mules, donkeys, sheep etc. Generally, while merchandise represents the majority of the people’s non-observable properties, cattle represent the majority of their observed properties.” [Majmu’ al-Fatawa]
Zakat on trade goods becomes obligatory only under the following four conditions:
- The owner acquired the property by being involved in some form of transaction, gifting, bequeathing, renting, or other means of acquisition.
- The owner intends to use these goods for trade and profit.
- The value of the goods must reach the nisab.
- A lunar year must lapse on the nisab
But items used to adorn the business or help facilitate it in a likewise manner are not zakatable.
Sheikh Yusuf al-Qardawi records a few other important and interesting points regarding zakat and business that we have highlighted below:
- Abu Ubaid reports the ways of calculating zakat as perceived by some of the great pious predecessors. He quotes Maimun bin Mahran as saying, “When zakat is due, calculate the amount of money, add to it the value of inventory and the amount of debts on customers that you expect to be paid, sum the total, deduct whatever debts you owe to others and pay zakat on the net.”
- Al Hasan al Basri says, “When zakat is due, one must add the amount of money, plus the value of inventory, plus the amount of debts, except the amount of hopeless debts, and pay zakat on the total.”
- Ibrahim al Nakha’i indicates that one must evaluate one’s trade assets and pay their zakat along with zakat due on one’s other holdings.” [Al-Amwal, p.426]
- Fixed assets are not subject to zakat. [Al-Amwal, p.426] The saying narrated by Samurah states, “The Prophet used to ordain us to pay the sadaqah on what we designate for sale.” Consequently, scholars do not include containers, cages, scales, machinery and tools in zakatable assets. [Fath al-Qadir, Vol1, p.527]
- There are multiple views on how to price inventory for zakat purposes: The majority’s view is to use current prices on the due dates of zakat. Jabir bin Zaid reports, “ Evaluation is done at the prices of the day zakat becomes due. Ibn Abbas is reported to have said, “It is alright to wait until the merchandise is sold, and then the due zakat is paid according to the actual proceeds.” Ibn Rushd reports a third view without attribution to any specific jurist, which is to appraise the inventory at its purchase price. [Bidayat al Mujtahid]
This article is Part 4 of an ongoing series titled, 'Zakat Made Easy'
Part 1: What Is Zakat and Why Should I Pay It?
Part 2: Analyzing Zakat In The Quran
Part 3: Conditions and Calculation Methods