Understanding Nisab
Who receives Zakah?
When should Zakah be paid?
Investing & Zakah
Estimating your Zakah
Distributing your Zakah
Zakah Application
There are different rates of Zakah that apply to different types of assets. According to 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, through analogy, Zakah rates for nearly all types of assets.
Zakah on Stock Investments
Stock investments are often categorized as gold and silver, i.e. financial holdings. According to Sheikh Yusuf Qaradawi, it is
more appropriate to categorize stock investments as "the produce of plowed land." Both are "productive capital" and both are 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 us guidance:
The Prophet (Pbuh) 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 cumpolsury (as Zakah on the yield of the land)."
Although the hadith makes reference to a Zakah rate of half of Ushr (5%), according to Qaradawi, this rate is not appropriate for investments like stocks as it is possible with stocks to clearly calculate net gains.
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 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% (10% for 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
How We Estimate Zakah
Our Zakah estimation nets the cash flows in and out of the account. As the figure below illustrates, the beginning-of-year
value is subtracted from
the year-end value, adjusted for new investments and disbursements. Reinvested dividends are excluded from the calculation since they are both
disbursements and investments.
