Definition and Purpose
Zakah is an annual wealth tax (2.5% for most assets, varying for others) owed once total wealth meets the Nisab threshold (87.48 g of gold or equivalent). It is paid by Muslim individuals and institutions to purify their wealth and support the poor and needy. Qur'anically mandated: "Establish prayer and pay Zakah" (Q 2:43).
Zakah-Eligible Assets
- Gold and silver: 2.5% annually (Nisab = 87.48 grams of gold or 612.36 grams of silver; below this, no Zakah).
- Cash and permissible financial instruments: 2.5% on bank balances, receivables, sukuk, and shares of liquid Shari'ah-compliant companies where applicable.
- Merchandise and inventory: 2.5% on goods held for trade.
- Livestock: varying rates for cattle, sheep, and camels, such as 1 camel per 40-49 camels owned, scaling up.
- Agricultural produce: 5% or 10%, depending on irrigation method and season.
- Minerals and treasure: 20%, representing one-fifth of extracted minerals or buried treasure found.
- Cryptocurrencies: 2.5% when treated like cash or liquid assets by contemporary Shari'ah scholars.
Zakah-Exempt Assets
- Personal use items: clothing, housing, and vehicles for personal use.
- Tools and equipment: assets used for livelihood, such as a farmer's plow or a doctor's equipment.
- Liabilities exceeding assets: if debts exceed assets, Zakah may not be due.
- Assets under Nisab: if total wealth is below the Nisab threshold, no Zakah is due.
- Property held for personal occupation: a family home is typically exempt.
Eight Categories of Zakah Recipients
Qur'an 9:60 specifies who may receive Zakah (Masarif al-Zakah):
- Al-Fuqara (The poor): those with virtually no income or assets.
- Al-Masakin (The needy): those with some income but insufficient to meet basic needs.
- Al-Amillon (Collectors): those employed to collect and distribute Zakah.
- Al-Muallafat Qulubuhum (Those softening hearts toward Islam): non-Muslims whose hearts are inclined toward Islam, historically used and rarely applied today.
- Al-Riqab (Slaves/Bondspeople): historically used to free slaves; today applied to human trafficking victims.
- Al-Gharimin (The indebted): those in debt due to legitimate necessity, not extravagance.
- Fi Sabil Allah (The cause of God): Islamic education, defense, and public projects benefiting Muslims.
- Ibn al-Sabil (The traveler): one stranded on a journey with insufficient funds.
Zakah Calculation Rules
Hawl (Lunar year): Zakah is due once per lunar year (Hijri calendar year = ~354 days). The year resets on the Hijri anniversary of acquiring wealth.
Niyyah (Intention): The payer must intend to discharge Zakah (not just giving; the intention distinguishes Zakah from voluntary charity).
Timing: Zakah becomes due once the Hawl period is complete and assets meet the Nisab threshold. It may be paid early (in the month before due date), but delaying beyond the due date is not permissible.
Multiple asset classes: Assets must be aggregated if they are fungible (all forms of wealth). E.g., if you own 50g gold + $500 in cash equivalent to 37g gold at market rates = 87g total, you meet Nisab and owe 2.5% on all of it.
Zakah in Islamic Institutions
Banks and financial institutions: Must calculate Zakah on:
- Shareholders' capital.
- Retained earnings.
- Liquid reserves.
Zakah may be collected on customers' behalf with proper documentation.
Investment accounts: If the institution holds customer funds for investment (Mudarabah, Musharaka accounts), Zakah is typically the customer's responsibility (not the bank's), unless the bank explicitly accepts the liability.
Sukuk (Shari'ah-compliant certificates): Sukuk holders owe Zakah on the underlying assets represented by the certificates where applicable. For example, if a Sukuk represents a lease of real estate, the holder owes Zakah on the rental income.