What is impure income from a Stock?

1. Interest income – impure
Generally, Interest income is money earned by an individual or company for lending their funds, either by putting them into a deposit account in a bank or by purchasing certificates of deposits.

2. Impure income from Sharia non-compliant investments
Any non-sharia investment fall under this category For example, many money markets instruments such as debt-based mutual funds and preference shares provide returns to their investors which arise either from interest or from trading of interest-based instruments.

3. Impure income from Sharia non-compliant business sources
In a few cases where the primary business of the company is Sharia-compliant, some impure income accrues on account of a few minor business sources which are Sharia non-compliant.
As per the Sharia, all the three categories of impure income, i.e. interest income, income from interest-based investments, and income from Sharia non-compliant business sources, should be considered for calculating the amount to be purged.
There are various purging methodologies of impure income, but we will discuss here only the

Purging method for Dividend-based:
Under this method, the purging of impure income is from dividends. The purging amount is calculated by multiplying the dividend received on the shares of the company held by the investor (whether individuals, institutions, or funds) by the ratio of impure income to the total income of the company.

The formula for the amount to be purged can be expressed as:
(Dividend Paid per Share X Number of Shares Held) X (Interest Income/Total Income)
Under this method, only the interest income can be purged.

For other purging methods, you can refer to the link for details.
Reference 1: Click here.
Reference 2: Click here.

Author: Aftab Alam (Riyadh – Saudi Arabia)