A Complete Guide to Zakat: Eligibility & Calculation | Musaffa Academy

Zakat is the fifth and final pillar of Islam that many Muslims know is obligatory and are called to pay on an annual basis. However, there are certain nuances that are not as well-known to the Muslim population. This article will attempt to explain how much wealth a person must have before Zakat becomes obligatory, whether all of a person’s assets are taken into consideration when calculating Zakat, how to determine the percentage of assets that are payable as Zakat, and who is entitled to receive Zakat.

This guide will help answer your Zakat Calculation questions. Whether it is your first Zakat year or you need to make sure you are calculating correctly each year using the right numbers, this guide will help you find the answers.

What Is Zakat?

The word zakat in Arabic language comes from the root zk which means purification and growth. In Islamic legislation zakat is an annual payment from an adult, sane person of compulsory level of wealth to the poor and needy. This payment is called obligatory charity to distinguish it from voluntary charity given by people without any obligation. Zakat is one of the main pillars of Islam and every Muslim who fulfills the criteria of zakat payment is duty bound to pay it.

In the Qur’an, both Zakat and Prayer are repeatedly referred to and coupled together. Likewise, in the blessed life of the Prophet, and in the preaching of Islam as exemplified in the Five fundamental pillars of which fasting the month of Ramadhan, reciting the Shahada, performing Prayer and hajj, are all encompassed in the duty of paying Zakat.

The deeper purpose of zakat is two fold: to free the wealth of the giver from its material grip and attachment; and to utilise the surplus resources of the more fortunate to help those in need. In a healthy Muslim community, zakat is the cornerstone of economic solidarity.

Zakat Eligibility: Who Must Pay?

Zakat is obligatory on every Muslim who fulfills all the above-mentioned conditions. Following are brief overview of each condition and their descriptions.

Muslim and Adult

Zakat is an obligation upon the Muslim’s riches when that Muslim has reached maturity (bulugh). A minority view holds that the wealth of a minor should be liable and that the minor’s guardian should pay the Zakat on their behalf. The majority view holds that Zakat is an obligation only upon the adult Muslim.

Free Ownership of Wealth

Is the wealth owned in full? In other words, in your reality, does the wealth really belong to you or have you lent it to future generations? Owned is the key word here. Is the money you have borrowed with an agreement to repay it your wealth or is it a liability? If the wealth is held in trust, then they have the potential to fulfill this key criterion not you.

Wealth Above the Niṣāb Threshold

In addition to the two condition namely, wealth that can be turned into cash (rupaaya) and quantities (qisma), zakatable wealth must also have a total of zakatable wealth which reaches or exceeds a minimum level. The level of this minimum is known as niṣāb. The levels of niṣāb are determined by the value of gold or silver, the difference lies between the schools of jurisprudence in using which value.

Completion of One Lunar Year (Ḥawl)

A Muslim must allow at least a full Islamic lunar year - approximately 354 days - to elapse with your wealth at or above the level of niṣāb before the requirement of wealth to pay zakat is implemented. This period of time is called the ḥawl. Therefore, a sharp rise in wealth above the level of religious consideration for zakat followed by a fall in the same year will not prompt a Muslim to pay the zakat until a full year has elapsed.

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The Niṣāb Threshold for Zakat: Gold and Silver Standards

The Niṣāb threshold is one of the criteria of zakat which applies to gold and silver. We will examine the Niṣāb threshold in greater detail in this article.

The concept of the niṣāb within zakat calculations is a point of contention for many accountants and it actually comes in two forms.

For gold the niṣāb is set at 85 grams which has a value today of approximately $7,200–$8,000. This figure can fluctuate so it would be wise to verify the figure on the actual zakat anniversary. All the four schools of law including the Maliki, Shafi’i and Hanbali schools apply the gold niṣāb to both cash and all other types of wealth.

Note that the silver niṣāb (the amount of bullion required for zakat) is 595 grams of pure silver, which currently translates into a cash or mixed (property and cash) niṣāb of approximately $535-$655. An important point to note for those of the Hanafi school of thought is that the amount required for zakat is lower than for the other three madhahib. Thus many will find themselves obligated to pay zakat on a mere few hundred dollars or so in savings.

Both the upper and lower limits of Zakat in the Islamic bank under study have been extracted from Prophetic Traditions narrated in many Hadiths in the two Hadith collections of Sunan Abi Dawud and Sunan Ibn Majah. As for non-metal commodities such as cash and tradeable items etc., there is scope for debate among scholars regarding the benchmark in such cases, whereas there is no scope for debate as to the legitimacy of the limits themselves.

Types of Zakat

In general terminology and within the context of Islam, Zakat is often used to mean both obligatory charity and voluntary charity. However, it is sometimes not realised that the term in Islam can be used to specifically describe two different forms of charity.

Zakat al-Māl (Zakat on Wealth)

Zakat is commonly known as zakat al-māl which is an annual payment of 2.5% of assets above a niṣāb held for one full lunar year. All cash and other liquid assets, savings, bullion, business stocks, trade debtors and other investments must be taken into account when calculating the zakat applicable to one’s wealth. See below for specific calculations.

Zakat al-Fiṭr (Zakat of Breaking the Fast)

Besides the Zakat that Muslims who have assets above a certain level are expected to pay, those who are able are also expected to pay Zakat al-Fiṭr (‘Poor rate of the fast’). It is paid at the end of the month of Ramaḍān, before performing the ʾid prayer. It is usually paid with the value of two pounds of food like wheat, barley, dates, or rice. In some countries this zakat is paid by the head of the household for all his family members including children, while in other places everyone pays by himself. The Zakat al-Fiṭr is meant to cleanse a Muslim’s fasting in the month of Ramaḍān and to provide the poor so that they may also enjoy the ʾid festival.

One of the features of zakat al-māl that distinguishes it from other forms of zakat is the fact that there are specified quantities or amounts, known as niṣāb (or in other cases amounts in excess of a year’s average income), over which the payment of zakat is obligatory, and over which it is not obligatory. In contrast, there are no such details specified for zakat al-fiṭr: every Muslim is required to pay zakat al-fiṭr provided that they have food in surplus of their immediate needs on the day of ʾid for which they are making arrangements. In this respect, therefore, zakat al-fiṭr differs from zakat al-māl in that both are separately determined and separately paid obligations.

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What Wealth Is Subject to Zakat?

The distributions required to fulfill Zakat al-maal are based on several different distributions depending on the types of assets in the possession of a wealthy Muslim. In this section we briefly explore the several distributions that are to be calculated and the distributions that are not to be calculated.

The Zakat Calculation Formula

Once you have established your assets it becomes easier to calculate your zakat as long as you know the formula and apply it. The zakat formula applies on all types of assets and is simple to calculate as long as you understand the components that are involved in the calculation. The formula consists of three simple steps.

First, calculate your total zakatable assets at anniversary of zakat and their value. Second, subtract all liabilities whether cash or notes payable (not notes payable long term). Compare the result to your niṣāb (threshold) and if both conditions are met, pay 2.5% on the total amount of zakatable assets. Example: $50,000 in zakatable assets and $10,000 in liabilities due and payable. Therefore, zakat would be calculated on $40,000.

Zakat formula in simple words: Zakat = (Total Zakatable Assets - Currently Due Liabilities) x 2.5% provided the result is above niṣāb.

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Worked Example

Amira’s zakat assets are: Her saving amount to $1800 and stocks portfolio of $4500. In terms of gold, she has 40 gms worth $3400. Yet she has yet to include her salary of $2100 to be received soon which also needs to be included in her zakatable assets. Hence her total zakatable assets would be $28000.

Sally has been piling on the debt by using her credit card. Her outstanding balance needs to be repaid of $900 and she also has an instalment of $600 to pay on her personal loan for the month. Together this means Sally has a total of $1,500 to be paid back before the month is out.

Net zakatable wealth is $28,000 – $1,500 = $26,500. There is more than enough to pay a niṣāb and in fact a full lunar year has passed for which we are overdue. The amount of Zakat due is therefore: 2.5% of $26,500 = $662.50.

Who Receives Zakat? The Eight Categories

The Qur’an, the Holy Book of Islam, describes eight different types of people who are to be helped with the zakat. These are the eight categories of people who are to receive zakat as prescribed in Surah al-Tawbah, verse 9:60. These categories are not recommendations of how zakat can be spent, but are the explicitly defined recipients of zakat in Islam.

In his comment on the book (The description of charity recipients), Shafi'i mentioned eight categories of those who are worthy of paying Zakat. They are: the poor (al-fuqarāʼ), those in need (al-masākīn), those employed to collect and administer zakat (ʿāmilūn), those whose hearts are to be reconciled (al-muʼallafat qulūbuhum), those in bondage seeking freedom (fī al-riqāb), those overwhelmed by debt (al-ghārimūn), those striving in the path of Allah (fī sabīl Allāh) and the stranded traveller (ibn al-sabīl).

Although all the above categories of beneficiaries are worthy of receiving zakat, in recent times the focus has been on the payment of zakat to the poor and those in need. Many Muslims pay their zakat through established Islamic charities and zakat institutions and it is then distributed accordingly.

Common Mistakes to Avoid

There are a number of common errors the Muslims are committing in relation to their annual zakat. Two of the most obvious mistakes revolve around the difference between the threshold values for gold and silver and choosing the correct one. Therefore those of the Hanafi school of Fiqh must ensure that they are using the silver threshold value which is less than that of gold, and those who are unsure of the threshold value must check the current market value against either.

Second error is to reduce the zakatable wealth by the whole value of long term loans, including a mortgage, a student loan and car finance. Although the total amount is owed over time, only the instalment for the tax year in question is relevant. Those who ignore this and instead reduce their savings by the whole of the mortgage debt are mistakenly taking the view that their zakatable wealth is zero. None of the schools of jurisprudence accept this.

Third, Including receivables in one's zakatable wealth such as the salary outstanding to employees, loans owed to others and invoices sent to creditworthy clients who are expected to settle the payments within a short period. Many are accustomed to not declaring these to the authorities and in the process settling a smaller zakat obligation than they should.

A point of confusion to many, including share holders of investo’s capital base, is that the purification of impermissible (haram) income (Riba) is thought to be the same as zakat. Share holders mistakenly therefore believe that they only have an obligation to pay zakat on the full value of their share of investo’s wealth at the lower rate of 2.5%. In actual fact, purification of Riba and payment of zakat are two separate obligations with separate calculations and separate recipients.

Bringing It All Together

Zakat is one of the easiest obligations upon the Muslim finances and yet perhaps one of the most misunderstood. While the formula is straightforward (rate: 2.5%, computation: annually) and the eligibility of assets to be subject to Zakat easy to know, the plethora of modern assets and their various forms can make it hard to classify them as either cash or investment. Even as people hold stocks, crypto, properties, and mutual funds, they need to understand how to categorize them for Zakat calculation.

Among the many things that need to be developed in a Muslim is the practice of several important habits with respect to zakat. For example, someone should choose an anniversary of the year they first learned about zakat, take a complete inventory of all of their zakatable assets on that same day each year, calculate what zakat needs to be paid based on what the person has on that day, and then pay it immediately. There is indeed weight to the zakat that is delayed without legitimate reason, but there is even more weight to the act of paying it with proper intention, and this is perhaps the most weighty act of worship for a Muslim to perform.

There is also more specific information for certain asset types such as gold, stocks, property, business assets, and some crypto assets. See the individual pages for more information on how these apply. The same valuation formula applies for all assets, but how you classify them depends on the type of asset.

And Allah knows best.

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