The exact meaning of the Arabic word Zakat is to grow in goodness, prosperity, and the purification of soul and wealth. The act of giving Zakat is purifying one’s wealth to gain God’s blessings for the wealth to grow in goodness.
Khaira Ummah known as the vision of the best community, Zakat is the major economic contribution that brings the Muslim society towards prosperity, security, and social justice. It also reduces the difference between the rich and poor.
There are some specific criteria that are subjected to Zakat. Amongst all these shares are subjected to Zakat. Shares, Unit Trusts and Equity investments that you have purchased with the intention to make a profit and resell and through which you receive dividends are all subjected to Zakat. According to Scholars Zakat on Business Shares depends on two things:
- The type of business that the company deals in.
- Considering it similar to the Zakat on business and trade.
There are two types of shareholders who are subjected to Zakat:
- The person who buys shares as an investment and wants to attain dividends. This kind of shareholder pays Zakat at a book and not on the market value.
- The person who buys shares to trade – i.e. trading stock. This type of shareholder must pay Zakat on the market value.
Hence, Zakat should be paid on the market value of the shares. If you invest your savings in a few managed funds with the intention to sell them for monetary gain, then the entire market value of the shares is subject to Zakat on an annual basis.
If you have Shares that have been purchased for investment and benefit from the dividends then the company is obliged to pay Zakat on behalf of the shareholders.
The company should consider the money of all shareholders as the money possessed by a single person. If the company doesn’t bother to pay Zakat for one reason or another then the shareholder must pay Zakat on his own shares and dividends.
Summary of How to Calculate Zakat On Shares
There are a few criteria on which Zakat is not applicable. You will not have to pay Zakat on Public treasury shares or charitable endowment shares because it is generally not permissible for Zakat to be invested in an endowment. Zakat needs to be distributed to worthy recipients. Having said that, endowments are an important part of the framework of a community but it should be established with Sadaqah funds before giving Zakat. We should also keep in mind that Non-Muslim owned shares aren’t subjected to Zakat.
Zakat is applicable on unused leased land. In this case, the shareholder should pay Zakat on the revenues of his shares and not on the value of the shares themselves according to the Nisab amount of 2.5%
If shares are purchased on a property with the expressed intention for resale then the entire holding is subject to Zakat. If shares are purchased as an investment to generate dividends, then Zakat is only due on the Zakatable assets of the firm.
Zakat is one way to show our gratitude to the Almighty, for the many bounties we have been blessed with. Zakat is a positive instrument in our life that shapes our soul towards feeling a deeper concern for our fellow men.
Therefore, Islam has made it compulsory to show kindness to the poor and needy through Zakat. As one of the pillars of Islam, Zakat is a system to distribute the wealth of the Muslims equally, thus increasing the flow of cash in the economy with a particular interest in the poor and the unfortunate people.