Islamic finance: A detailed look into payment of 'zakat'

Last week we learned the noble philosophy of zakat and some important aspects related to it. As it is important for the readers to know more about zakat during the holy month of Ramadan, we will continue with our discussion on the subject.

Categories of wealth on which zakat is due
These are personal wealth, including cash beyond the normal day-to-day expenses, stocks of gold and silver, jewellery (gold and silver content only), shares and investments, profit from business, work in progress (WIP) and finished goods.

In agricultural produce, ushur (agri-zakat) is due on produce from cultivated land such as crops and non-cultivated land such as orchards.

In livestock, zakat is levied on sheep, lambs, goats, cows and buffaloes (domestic, not wild) and camels. Animals raised as pets do not incur zakat.

What conditions make zakat obligatory?

The following conditions obligate payment of zakat:

Complete ownership
If an individual has given his property in a public trust, zakat is not payable by him. However, if it is a private trust, the beneficiaries of the trust are required to include their respective share in the calculation of their individual zakat.

Please note that borrowed cash is exempted from zakat because the borrower is not the owner of the cash. The owner of the cash who has loaned the amount will be responsible for paying the zakat on it.

Growth-oriented
Zakat is payable on a business if it is growing. If it is not growing due to reasons beyond one's control, zakat will not be paid. However, if the growth is not achieved due to negligence or mismanagement, zakat is payable. The owners of such business have to genuinely determine whether or not zakat is payable by them.

Nisab eligibility
As discussed earlier, it should be above the minimum threshold of wealth specified under the respective category of wealth, be it cash, precious metals, trading stock, livestock, investment, etc. Possession of nisab should be for one whole lunar year, categorised under personal wealth.

The wealth in question should be that beyond the necessities of the individual and his dependents. If the amount is barely enough for a year's necessary expenses, it should not be included in the calculation of zakat.

Debt Serviceability
If a person is in debt (be it interest bearing or not), which cannot be serviced from his regular income, and if the only way to repay it is to sell some assets, zakat should be calculated after deducting the debt amount. Zakat will be due on the net amount, provided it meets with the nisab requirement.

What is the rate of zakat on personal wealth?

It is a minimum 2.5 per cent of the value of the personal wealth on completion of one lunar year or at the anniversary of calculating zakat during the previous year. However, it can be paid higher than this rate in order to seek more blessings from God.

Is there zakat on personal jewellery of everyday use?

The majority of scholars agree that jewellery, whether in everyday use or stored for occasions, must be included in calculating zakat under 'personal wealth'. However, jewellery-making charges should be excluded. As such, it is preferable to get a break-down of the gold content and making charges while buying new jewellery in order to arrive at the correct calculation of zakat.

Please note that precious stones (diamonds, ruby, pearls, etc.) are exempted from the payment of zakat.

What about investment in shares?

Investment in shares are zakat-able. The agreed procedure to calculate their value is to take the lower value at the beginning and end of the year and average them out.

Is zakat payable if someone owns a house?

If the house is used for one's dwelling purpose, no zakat is payable irrespective of whether or not it is mortgaged.

However, if the house is bought for investment purposes, zakat at the rate of 2.5 per cent will be levied on the annual rent after deducting maintenance expenses and taxes.

Is zakat payable on land holdings?

Any kind of land holding, be it inherited, gifted or purchased, is exempted from zakat. However, if the land is sold, the zakat will be payable on the actual sale proceeds, and not on the amount originally invested or the market value at the time of acquisition.

What about owning a car?

If the car is for personal use, zakat will not be payable. However, in case of renting the car – considered a commercial activity – zakat will be payable on rental income at 2.5 per cent after taking out maintenance expenses.

How to treat provident fund for calculating zakat.

If the fund amount is withdrawable at any time, zakat should be calculated on the present balance of the fund since it will be similar to a savings bank account.

However, if the plan is restrictive and involves penalty and/or taxes on premature withdrawal, zakat should be calculated on the amount after accounting for the stipulated penalty and taxes. Another set of scholars opines in such a situation that it is allowable to pay zakat only upon realisation of the amount at maturity, net of taxes, if any.

They argue that technically the fund amount is not "owned" by the participant since it is inaccessible to him until the maturity date.

The writer is head of risk management at Dubai Islamic Bank.