Zakat & Beyond
Zakat & Business
Is There Zakât on Retirement Funds (401K, etc.)?
Typically, pension funds such as 401K’s are managed as follows: An employee makes optional contributions to his pension fund. The contributions are deducted from his salary checks. Employers usually contribute to the employee’s 401K fund by matching a certain percentage of the contribution made by the employee. This fund grows by contribution and investment and is returned to the employee when he or she reaches retirement age. Until the time of retirement, the fund is managed by an independent agency. The employee cannot use the fund or any part of it at will, since the fund is not supposed to be withdrawn until the time of retirement. However, if the employee must withdraw the money, then that initiates certain procedures. When the money is withdrawn, both tax and penalty are imposed on the amount taken and the employee receives the remaining amount.
According to Shaykh Qardawi, if the contributor has access to the fund and can spend it at will, then Zakât is due every year on the fund, like someone who pays Zakât on loans made to others that are expected to be paid back. However, if one has no access to the fund, then Zakât is to be given only when the money is received, that is, at the time of retirement.
Should 401K and Similar Funds Be Considered Personally Controlled or Beyond Personal Control?
Opinions differ. Some hold it to be under the control of an independent agency and others under the employee’s control (minus penalties). It may also be deemed a “good” loan (a debt likely payable in the future).
It seems best for the individual to consider all such accounts—401(k), Keogh, IRA, SEP-IRA, Roth IRA, etc.—as part of personal net worth, as the employee has eventual and determinative access to the funds. As a type of savings, it is zakatable at the rate of 2.5 percent annually (Zakât Calculation, 50-52). Usually not all the money is accessible to the investor for withdrawal, up to 50 percent normally being allowed. The following formula, authored by Dr. Salah Al-Sawy, secretary general for the Assembly of Muslim Jurists in America (AMJA), is suggested: (WA)-(PP)-(PT)=(ZA).
- Withdrawal Amount (MINUS) Prescribed Penalty (MINUS) Prescribed Tax (EQUAL) Zakatable Amount
Is Zakât Owed on Stocks, Shares, and Bonds?
Yes. There are two major opinions regarding Zakât on such assets, both concurring that stocks, shares, and bonds are zakatable. Stocks and shares represent ownership of a certain part of the capital of a corporation. Bonds are certificates of a loan borrowed by a government or municipality from the bondholder. A bond is usually paid back at a future point in time with interest
What Zakât Rate Does the Second Opinion on Stocks and Shares Prescribe?
This opinion holds that shares and bonds are analogous to commodities purchased for resale like any other business good. Therefore, their Zakât is calculated at a standard personal wealth rate of 2.5 percent of total portfolio value at the Zakât due date because they are bought with expectation of profit, and readily traded for money. Here stocks and bonds are both treated as “trading assets,” regardless of the economic activity of the issuing corporation. This is the opinion of Shaykhs Abû Zahrâ and Khallâf. Shaykh Qardawi believes that both opinions are sound and suggests that either method can be selected by the Zakât administration or payer.
Note: If the company pays zakât on all shares, the shareholder does not pay zakât because there is no double payment of zakât.
This book endorses the opinion that stocks and shares are trading goods, zakatable at 2.5 percent. The form recommends individual shareholders as the Zakât payers.
Confusion may arise in assessing Zakât on stocks for short-term traders. Recall that the passage of a year is required on nisâb only, not all of one’s zakatable earnings. So, short-term traders should estimate stock values on an established annual Zakât due date, regardless of stock purchase dates or value fluctuations, and pay 2.5 percent of total portfolio value.
What Zakât Rate Does the First Opinion on Stocks and Shares Prescribe?
This opinion holds that such wealth is analogous to “produce of plowed land,” and therefore its zakatable portion accrues at a rate of 10 percent of the return. If the owner purchased these instruments with the intention of long-term investment, it is the actual gain—and not the productive capital itself—that is zakatable. So shares of corporations are zakatable at 10 percent on the dividends of these shares. This view also distinguishes between shares and bonds. Bonds are analogous to debts that one can expect to be paid. Zakât, therefore, is payable on them every year at a rate of 2.5 percent. Modern Muslim scholars concur upon this ruling. Most Islamic jurists have also agreed that consideration of the market value of your portfolio is allowable from the beginning to the end of the solar Gregorian calendar year for ease of calculation purposes, but 10.3 percent of the gain should be paid to offset the difference between the lunar Hijrî and solar Gregorian calendars.
Is There Zakât on Interest Income?
Zakât is due only upon lawful money. Islam holds interest unlawful and bonds earning interest are no exception. Bonds are nonetheless capital owned by people and, therefore, zakatable. The prohibition on accepting interest does not exempt the recipient from paying Zakât on the principle price for which the bonds were originally purchased. Zakât is not calculated on the interest income of the bonds. Rather, all interest income is to be given to the poor (separately from Zakât) with no expectation of divine reward. (Fiqh az-Zakât, 331-338).
Are Debts Zakatable for Lenders?
Scholars generally classify debt as “good” and “bad,” similar to current fiscal credit categories.
- A good debt is acknowledged by the debtor, who expresses a willingness to pay. Lenders must pay Zakât on good debt every Zakât-year (hawl).
- A bad debt will likely not be repaid, either because the debtor is insolvent or he denies a debt for which there is no corroborating proof. The lender does not pay Zakât on bad debt, according to the majority of scholars. But should the lender ever receive repayment on a past bad debt, he is to pay the Zakât due on it for one year only (Fiqh az-Zakât, 74-76).
Is There Zakât on Debts for Debtors?
Opinions differ. The Mâlikîs, Hanbalîs, and Hanafîs hold that debt reduces the zakatable wealth of the debtor by the amount of the outstanding debt. Accordingly, debts are deductible from assets subject to Zakât (Fiqh az-Zakât, 90-94).
Shâfi’îs argue that Zakât is wealth under the payer’s control. Therefore, if one has nisâb for a Zakât-year one still pays Zakât on the zakatable wealth in one’s possession—even if one’s debts, were they to be deducted or paid, would consume one’s wealth entirely. That is, one pays Zakât on one’s eligible wealth, unless one chooses to pay debts before estimating Zakât dues. This concurs with the statement of ‘Uthmân ibn ‘Affân, third Caliph of Islam, who said in a Friday address (khutbah): “This is the month of your Zakât. Whomever of you owes debts, pay them back, that you may commence paying the Zakât on your assets” (Al-Amwâl, 437). (Incidentally, the month was either Ramadan or Muharram). In another version reported by Mâlik, ‘Uthmân reportedly said: “Let one in debt repay his debt, then pay Zakât on his remaining assets” (Al-Talkhîs, 178). This address came from the pulpit in the presence of many Companions. None objected.
Can the Wealthy Deduct Debt and Not Pay Zakât?
Optimally, if debts come due (or are payable) on or before the Zakât due date, one should repay them and then pay Zakât on all remaining zakatable wealth. Some scholars disallow debt deduction if debt due dates come after the Zakât due date. Zakât is the right of the poor and eligible. It is unjust to incur large debts in extravagance and then invoke debt deductions at the time of Zakât. This, in effect, denies the destitute their basic needs and rights for the sake of one’s extravagant lifestyle. If all one’s zakatable wealth is paid on without resorting to debt deduction, it will usually not cause a great increase in one’s Zakât payment (Zakât Calculation, 33-34).
What About Zakât Due on Business Wealth?
Being in business might involve investing money in the purchase or rent of property, furniture, and equipment. It may also involve having goods to sell. Another factor is the income generated from the business, which may be reinvested in the business or distributed to owners. Scholars classify business assets into two categories for the purpose of Zakât calculation: Trade goods and productive assets, including exploited assets.
What Does the Term ‘Trade-Goods’ Mean?
‘Trade Goods’ or ‘Saleable Goods’ are assets acquired for profit through sales, such as business inventory. These are items convertible to cash in the future. They include land and lots, houses, buildings, furniture, clothing, foodstuff, machinery, jewelry—anything purchased with an intention (or openness) to sell or trade for profit at some point. Thus, even livestock for resale fall in this category (although their Zakât and nisâb differ from trading goods).
How Is the Zakât of a Business Calculated?
Zakât for a business is calculated on the Zakât due date (or estimated prior to that date) according to the following formula: (1) Appraised Merchandise Wholesale Value (PLUS) (2) Cash on Hand and in Deposit (PLUS) (3) Good Debt Owed to Business (MINUS) (4) Eligible Debt* (TIMES) (5) 2.5 percent (EQUALS) (6) Zakât Payment.
- (AMWV+C+GD) -(ED) x 2.5 percent = Zakât Due
*Subtract eligible debts if you follow a juristic school (madhhab) that permits debt deduction. If the balance reaches nisâb (the monetary equivalent of 85 grams of pure gold), then Zakât is 2.5 percent on the balance. (Fiqh az-Zakât, 203, 213-216).
When and How Does One Determine the Value of a Zakatable Asset?
GENERAL RULE: Zakât is calculated based on the market value of an asset and distributed immediately upon due date. For example, one determines the market value of gold, a stock portfolio, trade goods, or luxury items in excess of personal use (i.e. jewelry, art, collections, etc.) as of the Zakât due date. If one delays calculating Zakât on shares whose prices fall or rise, Zakât is still paid on the market value as of the due date (Zakât Calculation, 30-31). Commercial commodity values are their wholesale price on the Zakât due date, whether they are designated retail or wholesale and whether they are higher or lower than the retail price. This is a majority opinion.
How Is Zakât Calculated on Rental Property and Income?
(There is more extensive discussion on pp. 41-45.) Zakât is assessed for rental property on growth only. The fixed asset itself is exempted from Zakât, which is calculated at 2.5 percent of net income after all expenses are deducted for the Zakât year.
Fixed Assets are not themselves income generating but help other assets generate income or produce. So store fixtures, computers, tables, even buildings or machinery that are not generating income but merely housing or running one’s business are all Zakât -exempt.
Exploited Assets are possessions obtained, not for resale, but to generate income and to provide benefit to their owners. These include assets rented for profit, such as residential buildings, means of transportation, and anything rented out for profit.
Rental businesses (equipment, cars, etc.) pay Zakât on (1) the wholesale value of all rental assets (considered trading goods) at 2.5 percent; and (2) on net income at 2.5 percent (There is an alternative calculation method (see answers pp. 54-56) (Zakât Calculation, 49-50).
How Is Zakât Calculated on Agricultural Products?
Agricultural produce is zakatable. Zakât is due on everything land produces that can be eaten and stored (such as grains, beans, fruit, dates, etc.) Nisâb on crops is measured in five volume units individually called wasq (1 wasq = 130.56 kg of wheat). Five wasqs equal 653 kilograms. This is the nisâb on agricultural yields.
There are two agricultural types of product: (1) At cost, and (2) without cost. The Zakât rate changes accordingly (Fiqh az-Zakât, 228-229, 242):
- Output from Irrigated Land: Zakât rate is 5 percent of net value of harvest—after deduction of costs, including irrigation, fertilizer, and operating expenses
- Output from Unirrigated Land: Zakât rate is 10 percent of gross value of harvest, since land is being watered mostly by rain, natural springs (There are straight mathematical percentage changes if land is partially irrigated for half the time, a third of the time, a quarter of the time, etc.).
Is Zakât Due on Agricultural Land?
No. There is no Zakât on land value, only on value generated (i.e., the harvest). If land is leased to a farmer, the farmer pays Zakât on the crops, the owner on the rent received. Zakât is 2.5 percent of net rental income for the landowner (see answers pp. 51-55 for alternative calculations (Fiqh az-Zakât, 255-256; Zakât Calculation, 27).
Is Zakât Due on Livestock?
Yes. Livestock is zakatable. Domestic animals and poultry for personal use are not zakatable (including for food, use, and enjoyment). Working animals for cultivation, etc. are Zakât-exempt. Nisâb and Zakât rates on various animals follow (Fiqh az-Zakât, 104-105, 131-137).