Zakat on Share, Simple way

Zakat is a fundamental pillar of Islam and is compulsory on all Muslims who reach the Nisab threshold.

If a person’s accumulated wealth meets the Nisab threshold and stays there for a full year, they must pay Zakat on it. How much Zakat is paid depends on how much wealth a person has, so it varies from person to person. 

We will discuss here zakat on SHARE only.

• Let’s See First Deoband FATWA

Question ID: 161593

Country: Saudi Arabia

Title: Zakah on invested money and profit earn on it.

Question: I have invested a amount of 4,00000 RS INR in Feb-2018 in an Shariah compliant investment company who will do business in Food products I will get profit after 2 years and 3 months in May 2020. Do I need to pay zakah this year in 2018 or in 2020 after receiving the profit amount please advice.

Answer ID: 161593Bismillah hir-Rahman nir-Rahim !(Fatwa: 1104/996/H=9/1439)

Zakah will be wajib each year on the capital and on the profits which you earn on it. Lunar year is taken into consideration in paying zakah and obligation of Zakah. Thus you should calculate your zakah as per Islamic calendar (Muharram, Safar etc.) instead of the year 2018-2020.

Allah (Subhana Wa Ta’ala) knows Best.

Darul Ifta,Darul Uloom Deoband, India.

• There are mainly 3 main ways in which you can work out how much zakat to pay on your shares.

1 . As per Market Value of your holding share

2 . As per Zakatable Assets of your investee company

3 . The 25% Approach

• Which of the 3 approaches is suitable for my shares?

A. If you are buying shares for a short-term , then the Market Value is most suitable.

B. If you bought shares for long term & hold, then the Zakatable Assets is suitable or the 25% approach is also advisable.

• 1 . Market Value

This is very easy and simple. Simply treat the value of your share portfolio in the same way as you would treat cash, and pay 2.5% of the entire portfolio value as zakat.

If you own shares and you purchased them with the intention of selling them quickly and making money, you must pay Zakat on them because they are considered as a form of accumulated wealth. The amount of Zakat you pay will be calculated based on the current market value of your shares.

If you received dividends from your shares, you treat the money earned as cash and pay Zakat on it as you normally would with all other forms of cash. 

Remember though, it’s what your shares are worth in the market at the time of paying zakat, not what you bought them for.

For example:

If you invested 8,000 INR in shares and those shares are now worth 10,000 INR, you would pay 2.5% of 10,000 INR, which is 250 INR. See Calculation ( 10000 x 2.5% = 250 )

• 2 . Zakatable Assets

Generally speaking, the zakatable assets of a company are those things which are liquid – things like cash, stock, etc. You do not pay zakat on illiquid things like property and machinery in a company.

You can find the liquid assets of a company by looking in their latest Annual Report.

These are some liquid assets;

Trade and other receivables – liquid

Other investments – liquid

Derivative financial instruments – liquid

Income tax receivable – liquid

Cash and cash equivalents – liquid

For Example :

Let’s  assume total Zakatable Assets for company is 15%.

Now let’s say your shares are worth 10,000 INR at the time of calculating your zakat. Again, remember it’s what your shares are worth in the market, not what you bought them for.

On 10,000 INR, you 15% of it (i.e. 1,500 INR is zakatable). See Calculation ( 10000 x 15% = 1500 )

You then work out 2.5% of 1500 INR , to give you your final zakat amount on your shares, which would be 37.50 INR. See Calculation  ( 1500 x 2.5% = 37.50 )

• 3 . The 25% Approach ( Optional – you may disagree )

The 25% Approach is similar to the above Zakatable Assets, except that if you do not want to work out the actual number of zakatable assets within a company, you can take a safe approach of saying 25% of the company’s assets are zakatable.

So in the above example of your shares being worth 10,000 INR, 25% of it (i.e. 2500 INR is zakatable).     See Calculation ( 10000 x 25% = 2500 )

You then work out 2.5% of 2500 INR , to give you your final zakat amount on your shares, which would be 62.50 INR. See Calculation ( 2500 x 2.5% = 62.50 )

Reference of 25% Approach below;

• Finally With Comparison

This is an approach that is endorsed by several scholars and charity Organization below link for further references;

https://www.islamicfinanceguru.com/articles/investment/calculating-zakat-on-shares

https://www.bursamalaysia.com/reference/faqs/islamic_market/faqs_on_zakat_on_shares

https://www.zakat.org/calculate-zakat-on-stocks-and-investments