Zakat is one form of charity in Islam. It purifies one’s wealth, whether that wealth is cash, gold, shares, or stocks.
What is stocks’ and shares’ zakat? And how can you calculate it? This is what we will discuss in this article.
What are shares?
First, let’s define the difference between stocks and shares. ‘Stock’ or equity represents the ownership of one or several companies.
Whereas ‘Share’ has a more specific meaning, where the holder owns a unit or more of the company’s assets.
Stocks and shares represent financial assets, upon which zakat becomes obligatory when meeting specific terms and conditions.
Ultimately, we can say that the terms may overlap, but in fact, stocks and shares express the same meaning and concept. That is, they constitute shares of capital.
Zakat is an amount of money paid on assets that have reached the nisab; the threshold representing the minimum amount of wealth that a Muslim must own before being obliged to pay it.
The approved nisab on most assets is the value of 87.48 grams of gold kept for a full lunar year.
Are shares halal?
To answer this question, we need to know what Muslim scholars said. According to them, shares’ permissibility (being halal) or impermissibility (being haram) is determined based on the company’s activities.
Also, Muslim scholars highlighted that dealing in stocks and stakes is forbidden / haram in the following cases:
- The company produces or sells haram goods such as alcohol or pork.
- The company offers haram services such as gambling or promiscuous activities.
- The company deals in riba and interest-based contracts.
It is worth noting that scholars have warned against purchasing shares in a company that partially deals in impermissible activities.
Generally, if a company is involved in impermissible activity, you must not deal with them. On the other hand, if the company is not involved in any impermissible practices, it is considered halal to buy their shares.
3 ways to calculate zakat on shares
Drawing on Muslim scholars’ fatwas, there are mainly 3 commonly used ways to specify the value you need to pay for zakat.
Those ways are
1. The market value approach.
2. The zakatable assets approach.
3. The 25% approach.
But before going into each approach, we should know that the intent behind the investment plays an essential role in the calculation of shares’ zakat.
If you are buying shares with the intent of a short-term investment/profit, then you should go for the market value approach.
However, if the intent behind your purchase of shares is to hold them for the long term (and perhaps sell them in the future when you earn a higher profit), then the zakatable assets approach or the 25% approach will be more suitable.
You might also consider consulting a knowledgeable scholar about your circumstances and which approach to follow.
The market value approach:
This is a quite simple approach. Only treat the total value of your portfolio the same way you would treat cash.
That means you will pay 2.5% of the entire value as zakat.
You also should remember that you are paying zakat on what your total shares are worth in the market at the current time, not the initial worth you bought them for.
For example, if you invested $10,000 in shares and those are now worth $15,000, you would pay $375, which is 2.5% of it.
The zakatable assets approach:
If you have a long-term investment intent for your shares, you can look into the zakatable assets of the company as the basis instead of the value of your shares.
To put it more precisely, you will look at the liquid assets to know the zakatable assets of the company by analyzing its latest accounts.
Generally, each company has assets that can easily be converted into cash in a short amount of time, such as:
- Currency or cash.
- Money in a bank account.
- Money market accounts.
- Treasury bills (bonds, notes..).
- Certificate of deposits.
- Account receivables.
- Prepaid expense.
- Mutual fund investments.
- Stock market investments.
These assets are different from non-liquid assets like land and real estate, etc., which can be difficult to liquidate quickly. Therefore, you need to check the company’s liquid assets in the balance sheet.
How to calculate zakat using the zakatable assets approach?
For instance, the zakatable/liquid assets in the company that you have shares in it; are worth up to 1 million dollars. In comparison, the current market value of it is 5 million according to the total number of issued shares multiplied by the share price. Thus, zakatable/liquid assets comprise 20% of the company.
Now let’s say your shares in that company are worth $15,000 at the time of calculating your zakat. In such a case, you pay your zakat based on the market value of the shares, not what they cost when you initially bought them.
Therefore, the zakatable amount on your $15,000 worth of shares will be :
$15,000 x 20% = $3,000.
Thus, by working out 2.5% of $3,000, you will reach your final zakat amount on the shares of the company, which would be $75.
In case you have a portfolio of different shares in different companies, you can repeat this across your portfolio.
The 25% approach:
You can use the 25% approach if you do not want to go through the actual value of the zakatable assets within your company. This approach is similar to the previous one, except you can directly work out that 25% of the company’s assets are zakatable.
So in the last example of your shares being worth $15,000, you say 25% of it is zakatable.
That means the zakatable amount will be:
$15,000 x 25% = $3,750.
Thus, by working out 2.5% of it, your final zakat amount on the shares of the company would be $93.75.
Several scholars and charities endorsed this approach following a thorough analysis of various funds.
Zakat on stocks
Zakat on stocks is nearly the same as zakat on shares; it depends on the intention you had when you bought the stocks. Is it for a short-term or a long-term trade/profit?
In brief, short-term stocks are treated like cash, in which case you pay 2.5% of (principal + profit) as zakat.
As for long-term investments, there are several opinions on this matter depending on scholars’ fatwas. In this case, the methods below could be followed:
- 2.5% of the zakatable assets.
- 2.5% of the profit.
- 10% of the profit.
Zakat on cash
As the name suggests, zakat on cash applies to the money that you hold, whether you keep it in a bank account or otherwise.
The zakat rate ( 2.5%) will apply to the money you’ve had for over a year.
How do you distribute your zakat?
You can distribute your stocks’ and shares’ zakat among the poor and people in need on your own, or through a charity in your local community or a non-profit organization.
In case you need to donate your zakat to the refugees, you can approach a specialized organization like Bonyan, which uses the donations in the best way to assist refugees.
Are stocks considered part of zakat?
Yes, stocks are considered part of zakat.
How do you calculate zakat on stocks and shares?
There are different ways to calculate zakat on stocks and shares, such as the Market value approach. Zakatable/liquid assets approach.- The 25% approach.
Does zakat apply to investments?
Yes, it does. Zakat applies to investments if it fulfills the conditions for paying zakat.