Is Zakat owed on stocks, shares, bonds, and like investments?
The short answer on Zakat due on stocks, shares, and bonds
Yes, and there is a Zakat Calculator for this.
Modern Muslim Zakat scholars regard shares and stocks as partial ownership of the capital of a corporation or business entity.
They assess bonds, even when these represent in part the forbidden financial practice of interest, as likely receivable loans, whether from a governmental body or enterprise.
They define stocks and shares as a capital contribution that reaps profit and risks loss. Bonds they frame as contractual financial instruments of set terms and compensations. Both forms of wealth hold market value that may rise or fall. Hence they are Zakatable.
The detailed answer on calculating Zakat on stocks and investments
Since an owner of growing wealth must pay Zakat on it, the question is (1) are these permissible forms of wealth, and (2) how should one assess the Zakat due on these forms of investment, for stocks and shares, and for bonds, in view of Islam’s legal categorization of them.
We can add to this a third question for our purposes. How does Zakat Calculator then estimate them?
The Shari‘ah permits the issue, acquisition, and transmission of common shares, provided the entities supplying or distributing them are not engaged in anything Islam categorizes as unlawful activity. One cannot lawfully own stock, for example, in a company that makes alcohol products for drinking or that distributes marijuana for non-medical purposes, or that creates financial instruments based on interest. Whatever the Shari‘ah forbids, its ownership, even partially, it also prohibits.
In the case of unlawful ownership of such disqualified assets, however – such as interest-bearing bonds (which is the normal profit mechanism of bonds) – its holder must still render their Zakat yearly on the capital they represent. Bonds, even with interest, are deemed a receivable debt payment because Islam does not “privilege” the prohibited.
In the well-known case of proscribed jewelry, for instance, its owner must nonetheless pay Zakat on its value (see Is There Zakat on Jewelry?) in the unanimous opinion of Muslim jurists. So the status of an asset’s prohibition does not exempt one from any Zakat due on it (and additional penalties may also apply).
How is Zakat calculated on stocks, shares, and bonds?
Scholars hold two major opinions on how to assess the Zakat of stocks, shares and bonds, primarily depending on who pays the Zakat on the wealth increase – the corporation or issuing entity, or the individual shareholder.
For the purposes of individuals calculating their own Zakat – which is overwhelmingly the case in our times – the Zakat Calculator is calibrated for the stronger and simpler of the two opinions; namely, Zakat comes due on profits, whether in the form of dividends or interest, or any combination of these, at the rate of 2.5% annually, provided that sum reaches the Zakat threshold of nisâb, the minimum quantity, or lower limits, that the Prophet, on him be peace, established as fixed thresholds at which a Muslim must pay Zakat from specific kinds of eligible wealth (see both Nisab and Zakat Calculation in a Nutshell and also What Requirements Qualify Wealth for Zakat?).
One does not calculate this minimum independently, but rather adds the sums of share or bond earnings to similar funds held by their owner, specifically other assets that amount to currency.
Nor does one establish separate Zakat Due Dates (ZDD) for these holdings, but rather uses one’s established ZDD to calculate their Zakat payment, even if purchased the day before that due date. The passage of a year (ḥawl) required on most Zakatable assets starts for all similar currency items in aggregate on the day after one’s previous ZDD (see When Is Zakat Due?).
The rationale for this ruling for the Zakat on shares and bonds paid by individuals analogizes these holdings to commodities bought, sold, and exchanged at market values that normally differ from their face values, regardless of the activity or entity that generates them. Thus, they constitute trade goods that are growth assets, on which Zakat always comes due once they reach nisâb.
How is Zakat calculated on stocks, shares, and bonds according to the other ruling?
This scholarly view assesses Zakat on these holdings according to the kind of business activity one’s capital investment goes toward. It holds that one owes Zakat on each of these forms of wealth only if the corporation or concern engages in trade. If one buys shares or bonds in a purely industrial enterprise, meaning the investments go into buildings, machinery, and infrastructure, Zakat does not come due on that investment, but only on the dividends distributed to the shareholder as profit.
This ruling sets its Zakat criteria according to whether the investment entity deals in trade or not, no matter if it does or does not take part in production activities. The shareholder deducts from its ownership the percentage of its capital share that goes into fixed assets and pays Zakat on whatever remains of its holdings. So one may pay different Zakat rates even if the value of his or her various holdings is the same.
This ruling is based on the principle that Islam does not subject to Zakat manufacturing facilities, including their machinery, as well as buildings used for work or business, along with assets not used specifically as tradable commodities. It analogizes these to trade assets as means that combine capital and profit, and liken them to agricultural land, whose Zakat comes only out of its profit on its production, not out of the land’s value itself.
We should note here that there are (additional) differing opinions about trade assets
(1) Their total net value is annually Zakatable at 2.5%
(2) The return they generate is earned income and Zakatable at 2.5%
(3) They are analogous to agricultural land whose net return and profit are Zakatable at either 5% or 10%, according to the investment put into them that Zakat period
In addition, many notable scholars deem this distinction between trade and industrial enterprises without basis in any of the principle sources of Islamic Law: the Quran; the Sunnah (Revealed Way) of the Prophet, on him be peace; scholarly consensus (ijmâ‘); and sound analogy (qiyâs). They note that so-called purely industrial corporations may earn much more than trade concerns. Moreover, shares from both provide growing capital returns annually.
Yusuf Qardawi, in his Jurisprudence of Zakat, holds that Zakat assessed according to this second opinion should occur as either
(1) dividends assessed Zakat at a flat rate of 10%, just like agricultural produce requiring no irrigation
(2) earnings to shareholders, who, therefore, pay Zakat at 2.5% of its market value, that is, for corporations overwhelmingly invested in the fixed assets of production or in the actual cost of trade for their goods, minus the real investment of fixed assets
Do businesses and shareholders pay Zakat on the same shares?
No. There can be no double payment of Zakat on the same wealth, according to most scholars, and this is the strongest position.
However, when legitimate Muslim authorities assess Zakat, rather than self-assessment of Zakat conducted by the individual, some scholars deem it more appropriate for authorities to impose due Zakat obligations directly on corporations and not on the individual, in accordance with the second opinion as outlined in the directly preceding answer.