Investing and Zakah
There are different rates of zakah that apply to different types of assets. According to Imam Malik, zakah is due on three types of assets only: “the produce of plowed land, gold and silver, and livestock.” Contemporary Islamic jurists have extrapolated zakah rates for nearly all types of assets.
Zakah on Stock Investments
According to Sheikh Yusuf Qaradawi, stocks
and investments are most appropriately
categorized as “the produce of plowed land,”
as both are “productive capital” assets which
yield gains. Qaradawi notes that zakah is due
on the gains of such “productive capital,” not
the “productive capital” itself. As for the rate
of zakah applicable to stock investments, the
following hadith offers guidance: The Prophet
(Salla Allahu Alayhi wa Sallam) said: “On a
land irrigated by rain water or by natural water
channels or if the land is wet due to a nearby
water channel, ushr (i.e. one-tenth, 10%) is
compulsory (as zakah); and on the land irrigated
by the well, half of ushr (i.e. one twentieth, 5%) is
compulsory (as zakah on the yield of the land).”
The hadith makes reference to a zakah rate
of half of ushr (5%). However, according to Qaradawi, this rate is not appropriate for
investments like stocks as it is possible to clearly calculate net gains. Thus, the full (10%)
rate is appropriate.
Zakah on Long-term Investments
Muslims are encouraged by their faith to invest
for the long-term. Though investors may see
gains in their portfolio value, the gain may
not be realized for years. Islamic jurists have
agreed that in order to distribute zakah sooner
rather than later it is allowable to consider
the difference in the market value of your
portfolio from the beginning to the end of
each Gregorian calendar year and pay 10.3%
(or 10% calculated according to the lunar
calendar) of the gain, if any, as zakah. This
method of estimating your zakah is based on
two assumptions:
- You have/will reach nisab within the calendar year
- You have held your investments or your resources for investment (cash, for instance) for at least one lunar year before your zakah is calculated for the calendar year
Zakah on Retirement and Brokerage
For the purpose of zakah, retirement accounts are considered part of net worth, as the
contributor has eventual access to the funds.
Thus for retirement accounts (401(k), Keogh,
IRA, SEP-IRA, Roth IRA), the investor is subject to
zakah on 10.3% of the increase in a Gregorian
calendar year. Public trusts and charitable
organizations are not subject to zakah.
The same method as that illustrated above
with Amana shares can be applied to zakah calculation for entire portfolios. Brokerage
accounts with Saturna Brokerage Services are
automatically incorporated as part of the zakah estimation performed by Saturna Capital.
