Islam is not just a religion but a complete way of life. It acts as a guidance for Muslims and encourages them to promote love, peace, social harmony and forgiveness. Islam is a religion which addresses social practices and one of the basic pillars of Islam includes Zakat.
The basic objective of paying Zakat is to create and maintain economic balance in society and promote discrimination of wealth. Zakat is an obligation which promotes circulation of wealth from rich to the poor of the society. It also purifies the wealth and reduces the financial gap between rich and poor. The basic idea behind Zakat is to acknowledge that everything we own is because of Allah and we should use it to remember Him and help that portion of the society who needs monetary assistance. It creates brotherhood and unity among the society. It also helps us to free ourselves from greed and personal desires.
Zakat is obligatory upon every Muslim who owns a specific amount of personal wealth and savings above a minimum amount known as nisab. It also becomes compulsory when we have a specific amount of gold, silver and other tangible properties whose value can be calculated. Nisab of different items varies significantly. Nisab of gold is raised when someone is in possession of 87.48 grams of gold for a lunar year. Zakat on silver is raised when someone is in possession of 612.36 grams of silver for a lunar year. Zakat payable is equivalent to 2.5% of either weight of silver and gold or equivalent to the value of silver and gold. Zakat is only applicable on those possessions which have been in control of the person for more than one lunar year which compromises of 354 days. In most of the Muslim countries, Zakat is paid voluntarily while there are other countries where it is collected by the state.
If you have to calculate Zakat on your investments, you have to first analyze how much assets you own and what is the value of those assets. Zakat-eligible assets include stocks, savings, investment properties, cash, business income and precious metals such as gold or silver. Zakat is not payable on assets used for daily life such as cars, houses, clothes and land currently being used by the person. Zakat is based on the amount that is left after you take care of your own and your family’s expenses.
After you have determined how much worth all of your owned assets are for the year, you need to subtract debt from credit cards or college loans from your net worth for the year. Subtract your liabilities for the year from Zakat-eligble asset’s worth. Now you will be left with an amount on which the final amount of Zakat can be calculated. If that amount exceeds nisab, then it becomes mandatory or else if that amount is below nisab, you are then not required to pay any Zakat on it. If your total net worth for the year is above nisab threshold, give 2.5% of the total amount as Zakat and even more if your financial situation allows you to.
Another instance can be, if we assume that the investor of these financial assets is in fact a long term investor, he will have to pay zakat on sale value of the shares. When you’re a frequent trader of a commodity, you need to pay zakat on the value of that commodity in your possession. Hence, short term investors would pay zakat on the full value of their stocks in the same way that an oil trader would pay zakat on the value of oil in his inventory at the end of lunar year. In both cases, they are paying zakat on the commodities they are trading. The best way to calculate zakat on financial investments is to base the calculation on the market value of the assets or portfolio of investments. Let’s assume one lunar year has been passed since you owned the investments, you will calculate the sale/market value of the shares/investments and pay 2.5% of that value as Zakat.
If you have to ensure your Zakat is being spent on fellow Muslims, you should give it to recognized and registered charities. You should always make sure that your zakat is going in the right hands who will help the people in need.