Literal meaning of the word “Zakat” is cleansing and growth. In keeping with these qualities, Allah has prescribed Zakat as an obligatory charity, as a duty to Allah, upon every wealthy individual. Wealthy individual is defined as one who is in possession of a minimum amount of wealth called Nisab for an entire year. This charity is prescribed in order to cleanse the individual’s wealth, heart, and by extension the society in general, of the baser characteristics of miserliness, selfishness, greed, and materialism and replace them with higher qualities of generosity, love and care, and mutual help.
Various scholars have defined it more or less in this manner. They have also developed further definition of the amount that constitutes Nisab, categories of wealth, the rate of Zakat that applies to each category of wealth, and the rules of eligibility for receiving assistance from Zakat.
Zakat-al-Mal is the obligatory charity paid by an individual to the needy. It is obligatory on an individual who possesses wealth equal to or above a minimum amount called Nisab for an entire lunar year. For the purpose of calculating Zakat, different categories of wealth are defined. Nisab for the category of “Personal wealth” is three ounces of gold (or its equivalent amount in money). However, this amount is defined for each type of wealth separately. See under Nisab.
Zakat-al-Fitr is a special charity paid to the needy on or before the day of Eid-al-Fitr, which is first day of the month of Shawwal following the month of Ramadan. An individual who is in possession of the Nisab, (three ounces of gold or its equivalent amount), on the day of Eid-al-Fitr pays this Zakat. For Zakat-al-Fitr, one does not need to possess Nisab for the entire lunar year. This is paid as atonement for any shortcomings in the worship of Fasting during the month of Ramadan. This is calculated as a fixed amount per person. An individual pays this on his/her behalf and the dependents. This amount is specified as the cost of one normal meal and therefore it varies based upon the time and place. One may estimate this amount oneself or contact any Islamic scholar or institution for help.
Zakat is one of the pillars of Islamic life. It is a duty to Allah that obligates every wealthy individual to share with the needy a portion from his/her wealth. It is a very important institution for the individuals as well as the society in general. This institution aims at not only alleviating the financial hardships of the less privileged in the society through sharing a small part of one’s wealth, but also building a society on higher moral and spiritual values. It checks the baser instincts of greed, miserliness, and selfishness, which lead to materialism. It promotes mutual caring, love, and generosity leading to gratitude to Allah. For those who receive assistance from Zakat, it reduces their economic burden and they are enabled to pay attention to the family, social, and spiritual aspects of their lives.
Though Zakat is an act of sharing, it is discharged, as a duty to Allah, and in that respect is distinct from an act of normal charity.
If there is an Islamic government, Zakat will be collected by the Government and distributed to the needy. In the absence of such an arrangement, this function can be discharged through any voluntary collective effort, for example, through any private organization. Ultimately every individual is personally responsible for discharging this obligation and must take care of this every year.
There are, in general, the following categories based upon commonality of either the Nisab or the rate at which Zakat is calculated for different types of wealth. They are:
1. Personal wealth, which includes the following.
o Money beyond the normal level needed for everyday expenses,
o Gold and silver,
o Jewelry (only the gold and silver content),
o Profit from business,
o Inventory levels in business of unfinished and salable items,
o Money held in restricted funds such as retirement funds when they are freed for use.
2. Agricultural produce, which is further classified into the following.
o Produce from cultivated land
o Produce from non-cultivated land
3. Items that are mined or extracted from the Earth including any buried treasure that is discovered.
If this is done as a business, like in mining, and oil, it may be classified along the lines of a business.
4. Live stock, which is further sub-divided into following three categories.
o Sheep lamb, and goats
o Cows and buffaloes (domestic, not wild)
5. All other animals
There is no Zakat on these animals that are raised as a hobby. If these animals are raised for business, the profit derived from this business will be handled as the profit gained from any other business, viz. As a part of the “Personal wealth” category. There will be no tax on its inventory since its exact count can not be established with certainty. For example, animals in a fish farm.
There are different opinions about this. However, the general opinion is that jewelry, whether it is normally in use, or stored for occasional use, must all be included in calculating Zakat. The value of the gold or silver content in the jewelry should be included in the category of “Personal wealth”. Precious stones (diamonds, ruby, pearls, etc.) are not to be included neither the labor cost of making the jewelry is to be included.
Though owning a share of stock of any business is like having a share in the ownership of the business; we have categorized it as “Personal wealth”. Therefore, the lower of the value of stock at the beginning and the end of the year should be added in the category of “Personal wealth”. This is categorized as “Personal wealth” because of two reasons.
1. For the most people who own stock it is held as a saving with expectations that it will grow in value over time. In fact it is readily traded for money. Considering it as a readily redeemable asset, we have treated it as another form of saving. Therefore, we suggest using its fair market value in calculating Zakat.
2. Calculating Zakat on stock treating it as a share in ownership is normally not very convenient. There are literally millions of shares owned by general public. A stockholder will need to know his/her share of cash on hand, profit, and inventory, in order to use those values in the calculation of Zakat. This information is ordinarily very difficult to obtain, unless it is a partnership of a few people. Therefore, we did not treat stocks as a business partnership.
When one is engaged in business, whatever its nature, one usually invests some money in the purchase of building, furniture, and equipment. Next there is investment in inventory (raw material, or work-in-progress, or finished goods). The inventory on hand is eventually sold and converted into cash. The third element is the net profit (after all expenses and taxes etc. are paid) that the business makes. This net profit flows into the cash that the business holds for further distribution to the owners or for re-investment. There are only two items on which Zakat is paid.
1. The operating cash on hand (or in the bank) and the net profit made during the year (if not already included in cash).
2. The value of inventory at the end of the year
These two items are to be included by the owner in the category of “Personal wealth”. If there are many owners, the cash on hand, the profit, and the value of inventory shall be apportioned according to their respective shares, and each one will be responsible for the Zakat on ones individual share.
This business has to be operating for at least one year. If any share of the business is sold during the year, that share will not be included in the “Personal wealth” of the seller or the buyer because neither of them had it for at least one year.
The assets used in the production of wealth (building, furniture, equipment, and even some animals or any other assets) are exempt from Zakat because Zakat is collected from the output from those assets.