What is Zakat?
Zakat means “to purify, to grow, and to increase.” Zakat is the third foundational pillar of Islam. It is a mandatory duty on the part of a Muslim to make the payment of charity out of the net personal wealth after completion of a year, provided it is above a specific limit. It is obviously a service to human beings. However, more importantly it is a service to God. It is an act of worship (ibaadat) on par with Salat, Roza and Hajj.
Conditions for applicability of Zakat
Following conditions should be satisfied in order to make a person liable for Zakat.
- He/she should be Muslim
- His/her wealth should reach the minimum Nisab level
- One lunar year should pass from the date when the Nisab level was achieved.
- The wealth is under the possession and control of the owner and he has the authority to dispose of the wealth.
- The wealth has the potential for growth or grows physically due to its utilization in business or due to biological factors.
- The wealth is generated after basic needs are satisfied i.e. food, home, clothing, transportation.
What is Nisab ?
Nisab is the minimum limit of wealth below which Zakat is not payable. However, if the wealth exceeds this minimum level, Zakat is payable. The Nisab limit for Gold is 7 ½ tolas (87.479 grams) while for Silver it is 52 ½ tolas (612.35 grams) or its equivalent. The price of Gold on 26th March 2020 in Mumbai was Rs. 4217 per gram while the price of Silver was Rs. 41.81 per gram. Accordingly, Nisab level is established at Rs. 3,68,900/- for Gold and Rs. 25602/- for Silver. (Reference: www.goodreturns.in). Please check the applicable Nisab level on your Zakat Due Date.
Completion of the Lunar Year: Hawl
Nisab is closely connected with Hawl i.e. passage of one lunar year from the date of achieving Nisab. Zakat is payable on the quantum of wealth if it has reached the minimum Nisab level. The condition of Hawl is applicable to certain categories of Zakatable wealth i.e. net personal wealth – Gold, Silver, bank balance, cash balance, financial investments, merchandising goods etc. however, the condition of Hawl is not applicable to other types of Zakatable wealth e.g. agricultural crops, fruits, honey, metals, and treasures etc. there is no need for the passage of one lunar year in such cases. Zakat is due immediately on extraction of these items from earth.
Zakat Due Date
It is always better to follow one particular date as the Zakat Due Date so that it is easier to know the fulfillment of condition of Nisab and the completion of Hawl. With multiplicity of different flows of cash incomes from various sources, it is not possible for a person to fix the Nisab level for each and every transaction. Therefore, it is advisable to fix a date, let us say, 1st Ramzan of every year as the Zakat Due Date on which one will undertake stock taking of everything a person owns and what he owes to others. Year after year, if the same date is followed, it brings lot of discipline and leads to ease in making the Zakat calculations. Since most of the people pay Zakat during the month of Ramzan, it is better to adopt 1st Ramzan as the Zakat Due Date. Of course, the reader can choose his own convenience or continue with his existing practice. If last year’s Zakat Due Date is known, then the same date will be Zakat Due Date this year.
Zakatable Assets and Zakatable Liabilities
Zakatable Assets are those assets which actually grow or have the potential to grow and are in sole custody and control of the owner and held by him during the complete lunar year.
Originally, Zakat was applicable on five categories of wealth:
- Gold, Silver, financial products – Cash, Bank deposits, Shares etc.
- Stock of merchandise or goods for trade
- Agricultural produce
- Livestock – herds of cattle – camels, cows, buffaloes, sheep and goats
- Rikaz (Treasure troves): Buried precious metals or minerals.
However, in the modern times, the form of wealth has undergone number of additions. New financial products keep evolving in the market. The new products Mutual Funds, insurance policies, bitcoins, ETFs, LLP share, financial products, etc. The nature of financial transactions has undergone a number of changes over the years. Assets get frequently changed during the cycle of one Zakatable year from Gold to cash, from cash to merchant goods, from merchant goods to properties, from properties to cash, etc.
We need to figure out where and which category each asset falls, so that accordingly, its Nisab value could be determined. This requires examining the nature of the asset, what exactly was the intention of the person during its purchase, what is its utilization and what output is it generating. This will determine its category and the applicable rate of Zakat which varies from minimum 2.5% to maximum 20%.
Zakatable Liabilities are those liabilities which have been incurred in relation to the acquisition of Zakatable assets. For example, Short-term loans and advances taken for running a business, bank overdrafts, cash credits, export credit, trade financing, outstanding payments to creditors or suppliers would qualify to be Zakatable liabilities. The amount of Zakatable liabilities needs to be deducted from the Zakatable assets in order to ascertain net personal wealth on which Zakat is to be paid.
Note:- Zakat is attracted on Zakatable Assets after deducting Zakat Liabilities. Non-Zakatable Liabilities cannot be deducted from Zakatable Assets
Revenue generating assets which are utilized in the business for carrying out the operations of the business and not intended for resale in day-to-day business transactions. These assets are: agriculture land, properties or vehicles given on rent, rearing of cows to get milk, breeding of honeybees for extracting honey, sheep for extracting wool, hotel rooms for earning room tariff, etc. These assets are themselves not subject to Zakat however, the output from these assets is subject to Zakat. Moreover, if they are sold out, the profit on its sale, will also be subject to Zakat payment.
Assets which are not revenue generating and not intended for business in ordinary course of business e.g. residential house, furniture at home, personal cars, vehicles for personal use.
Fixed assets employed in business generating no income on their own but helping other assets generate income, e.g. shop premises, godown, factory building, plant and machinery, office furniture fixtures.
Value of assets, although Zakatable, but below Nisab level of Gold/Silver.
These are the loans and advances taken for acquisition of Non-Zakatable assets. Long-term loans for acquisition of plant and machinery, construction of building, lease financing, home loan, vehicle loan, furniture loan, etc.
Note: Non-Zakatable Liabilities cannot be deducted from Zakatable Assets.
- There is no Zakat on personal wealth – food, clothing, furniture, residence, car, scooter, motorcycle.
- There is no Zakat on gems, Diamonds and precious stones.
- There is no Zakat on land.
- There is no Zakat on shop premises, office, godown, factory, plant and machinery, equipment, furniture and fixtures used in the business.