Zakat is the mandatory divine obligation in terms of charity contribution and it forms one of the five pillars of Islam. Once zakat is due on your wealth and if you does not pay, then it’s more like you are withholding someone else right on that money.
Zakat is the spiritual growth of money by giving it away as charity. It purifies your wealth and you are rewarded in the afterlife. Zakat is an act of worship through a compassionate act of sharing your wealth. The intend to pay and ensuring the possession of zakat is on the zakat payer.
The concept of Zakat
Everything in the universe, in the heavens and on the earth and everything under its surface is owned by Allah, both in terms of creation or action (it is under the power of Allah), and destination (it will return to Allah). Basically, Allah the Almighty owns everything, while man just has the right of dealing (with it)
Who pays Zakat
All Muslim adults who are of sane mind and have possession in excess of the Nisab value need to pay zakat.
The head of the family or a father may pay the zakat due for the other family members including children if they possess income in excess of Nizab.
Nisab is the minimum amount of wealth that a muslim need to possess for a whole year before zakat becomes due. Nisab is the cash equivalent of 87.48gm of gold or 612.36 gm of silver in current market value.
Categories of wealth on which Zakat is due;
• Gold, silver sovereigns( including jewelry) and cash
• Trade items intended for sale on sale value
• Stock holdings (share)
• investment property.
Even if you have bought a property with the intend to sell it then zakat is due on the market value. But if you bought a property and sold it after a few months but never intended to sell it at the time of purchase then no zakat is due.
Due to some unforeseen circumstances like market crash if you are unable to sell your property or goods which was bought actually with the intend to sell then there is no zakat due until you are able to sell it. If you buy shares with intend to get only dividend then no zakat, but you bought with intend of trading then zakat is due on investment amount. Rent income from property or assets, but not on self-occupied home.
Personal items and expenses such as home, furniture, cars, food and clothing and living expenses are not included.
How Zakat Is calculated
Zakat net worth = Zakat assets – Zakat liabilities
If Zakat net worth is more than than Nizab then pay 2.5% on that value as zakat.If you are following Hijri calender pay 2.5%as zakat and if you are following Gregorian calender pay 2.557% as zakat.
Zakat can be paid monthly or during the sacred month of Ramadhan. If you have decided to pay zakat on the 1st of Ramadhan every year, then stick to the same. In a given month if your net worth as discussed exceeds Nizab then you can compute zakat amount and pay it the same month. Zakat can be even paid in advance and its permissible.
On profit generated on an investment zakat is due the same year. But on unexpected income like inheritance zakat is due on completion of 1 year.
Suppose you have a mortgage or car loan of 10lakh on which you are paying 10,000 as monthly instalment, consider at the same time you have INR3,00,000 in your bank account(assuming that you are above Nizab limit) you are bound to pay zakat rest of your wealth. You can deduct the monthly instalment as expenses for zakat computation.
Example : Zakat computation for Salaried;
Calculation of Nizab
Assume value of 1gm of Gold in today’s value is INR 2750/-. So Nizab value would be INR 2,40,570/-
Salaried monthly income is INR 50,000.
Assumptions made here: Married, staying in own home, owns a car, owns 25 gms of ornaments and 30 gms of gold coins and no other income generating assets or business.
Here we assume, the person pays zakat during Ramadhan, so he follows Hijricalender.
Suppose from the monthly salary after living expenses, household expenses and after tax you are saving INR 10,000/- in a month, which you are investing in a bank without riba (interest). Now here you pay zakat when your zakat eligible assets in cash, precious metal, shares, investment property income is more than Nizab value(INR 2,40,570)
Here in this case when you take gold value in possession (25gms + 30gms) its INR 1,37,500/-. Now add up your monthly salary savings of INR 10,000 per month, to a annual savings value then it totals to INR 1,20,000/-.(Rs.10,000/month X 12)
Now your total zakatable net asset would be INR 2,57,500.(Rs.1,37,500 + Rs.1,20,000)
Here you need to pay a zakat at the rate of 2.57% on Rs 16,930 (Rs.2,57,500 – Rs.240,570) which is Rs.435/-
Note: There is also a stand that the savings need to complete 1 year, only after which zakat will be due on that amount. Suppose if you save Rs.25,000 as savings in your account then the amount in your account needs to complete 12 months for zakat to be due.
What can be paid as zakat
Zakat can be paid in currency, gold, silver, stocks, livestock, property or another asset that is worth the same in gold value in terms of zakat.
Zakat can be paid to those relatives who are not in blood relation with you such as parents, spouse, siblings and relatives whom you are liable to look after. Other than that any relative is eligible for zakat and should be paid zakat.
Zakat rate varies for various forms of Wealth
Salaries and independent business the rate is (2.5% or 1/40th)
Agricultural produce or farm products the zakat due would be, for naturally irrigated (by rain) is (10% or 1/10th of the vaue of the harvest) and if they are irrigated by other means then its ( 20% on 1/5 of the value).
Live stock it depends on the number of live stock under your possession
Minerals,mines, buried treasure and sea products(20% on 1/5 of the value),
Whom do you owe Zakat
The alms are only for the Fuqara (the poor), and Al-Masakin (the needy) and those employed to collect (the funds); and to attract the hearts of those who have been inclined (towards Islam); and to free captives; and for those in debt; and for Allah’s cause, and for the wayfarer (a traveler who is cut off from everything); a duty imposed by Allah. And Allah is All-Knower, All-Wise.” (9:60)
The following people who deserve Zakat:
• The Poor – These are the people who don’t have means to live their life properly and live below the line of poverty.
• The Needy – These people are also poor and needy who do not have livelihood or any possession, however, because of their pride they don’t expose their poverty.
• The Zakat Collectors – These are the people who are given the duty of collection of Zakat from other people. It includes the trustworthy institutions and NGOS who are working to help underprivileged Muslim communities.
• The New Converts – People who convert to Islam are also eligible as Zakat recipients. For example, if someone has converted and is detached from their family and friends, you can give your zakat to them so that they can start their new journey.
• To Free Slaves – The money of Zakat can also be spent on freeing the slaves. Slavery is prohibited in many parts of the world but there are still some places where people are illegally trafficked and kept under confinement. Zakat money can be used to help free these people and provide a living to them
• To Help Someone Pay Debt – Those who are in debt and cant afford to pay it off on their own are also eligible for Zakat.
• In the Cause Of Allah – Zakat can also be given to people who strive in the way of Allah.
• For Travelers – Zakat can also be given to the travellers and wayfarers as they might need the money when it comes to travel arrangements. Refugees are also wayfarers and can be given zakat money as they leave their countries because of violence and oppression in search of a safe and better place.