Question # 300: My dad who lives outside India, He gifted us (his 3 daughters) a company in India, around May 2016, which he had invested from overseas officially, this company is not shariah compliant, has 2 pieces of land of which one is generating income by via rentals for the warehouses built on it. Also, extra funds are invested in mutual funds. No dividend paid to us so far. What is our Zakat liability for same?

Bismi-llahi r-raḥmani r-raḥīm,

Assalamu ‘laikum warahmatullahi wabarakatuh,

All praise and thanks are due to Allah (سبحانه و تعالى), and peace and blessings be upon His Messenger (صلى الله عليه و سلم).

Dear questioner,

First of all, we implore Allah (سبحانه و تعالى) to help us serve His cause and render our work for His sake.

Shorter Answer: There is not enough clarity on the business conducted by the company in which you are a partner, except for the land ownership and mutual fund investments. Based on the information provided, you should pay Zakat either according to your share in business in individual capacity or along with your sisters. The zakat on the business should be calculated based on the Zakatable assets of the company (which include cash and bank balances and value of one’s stock and merchandise based on the market value on the Zakat due date), less the liabilities (only the current and due liabilities) incurred in respect of those assets at the end of the relevant Zakat year, to which Mutual funds investment at the Net Asset Value and land value, according to the intention of ownership, should be added to arrive at the total base (presuming that the rentals from land are already reflected under cash balance). From this, you should calculate your share and added to it other zakatable assets possessed in personal capacity (not as part of the business) to calculate total worth of the wealth, on which the Zakat rate should be applied. However, if the Zakat is paid based on the fiscal/ Gregorian calendar, then Zakat rate should be calculated at 2.575% to accommodate the 10 extra days difference between the lunar and the Gregorian year.

Long Answer: Every believer, regardless of whether man, woman, or child, who has excess wealth (over the nisaab) of their own, is liable to pay a 2.5% annual zakat of their net excess wealth in Shari’ah. Zakat is not determined from one’s earnings or profits, but rather on the net excess wealth which is left over after paying all expenses, and it has been in their possession for a period of one calendar (lunar) year. Moreover, Zakat is not an income tax; but the right of the poor, which Allah (سبحانه و تعالى) has reserved in the excess wealth of the rich.

Let’s first discuss the calculation of zakat for share/partnership in a company, on land and mutual funds investment; then, we will discuss your liability.

Calculation of Zakat on Business

Where you are not the sole shareholder/owner of a business, you have two options:

  1. Let the business calculate the zakat due and pay it on your behalf; or
  2. You calculate your portion of the zakat.

Narrated Anas (رضي الله عنه): Abu Bakr (رضي الله عنه) wrote to me what Allah’s Messenger (صلى الله عليه و سلم) has made compulsory (regarding zakat) and there was mentioned in it: If a property is equally owned by two partners, they should pay the combined zakat and it will be considered that both of them have paid their zakat equally. (Bukhari).

The first option is only feasible if you have Muslim partners. If you elect this option, you need to ensure that your partners have calculated and distributed the zakat correctly. If you elect the second option, then you should calculate the zakat based on your shareholding of the net assets in the following manner:

The shareholders/ partners in a company/ partnership must pay Zakat on the Zakatable assets less allowable liabilities in proportion to their shareholding/ profit-sharing ratio or mutually agreed upon per the partnership deed, as the case maybe. Suppose XYZ Corporation has 5 shareholders/partners, A, B, C, D, and E, who own the shares in the company/ partnership in equal proportions. Company A carries on business as a manufacturer of garments (Shari’ah compliant business). Each shareholder/ partner will be liable to pay Zakat at the rate of 2.5% of the Zakatable assets of the company, less the liabilities incurred in respect of those assets at the end of the relevant Zakat year. The Zakatable position of Company/Partnership XYZ at the end of the relevant Zakat year is for example as follows:

Zakatable Assets
Business Merchandise Inventory

$200,000
Cash on hand

$40,000

$240,000
Less: Current Liabilities (payable immediately)
Creditors

$50,000
Loan Accounts

$110,000

$160,000
Total Zakatable amount

$80,000

Note:

  1. No zakat is due on stock/inventory not intended for trade.
  2. No zakat on receivables till they are actually received.
  3. As for creditors/ liabilities, only the current and (due) liabilities are deductible.
  4. Fixed assets are buildings, plant and machinery, equipment, furniture and fittings, computers goodwill, etc. – all these items are used by a business to generate a profit and are not retained for sale. Scholars are of the opinion that no zakat is payable on fixed assets on the basis that they are used to generate income.
  5. The value of one’s stock and merchandise should be calculated on the wholesale market value (and not retail price) of that item available on the Zakat due date. (This view is one of the recommendations of the First Contemporary Zakat Questions Symposium)
  6. Regardless of whether a company makes a financial profit or loss in a financial year, as long as the company has net assets, one would be liable to pay 2.5% annually of the total net asset value of the business. However, if the Zakat is paid based on the fiscal/Gregorian calendar, then Zakat rate should be calculated at 2.575% to accommodate the 10 extra days difference between the lunar and the Gregorian year.

Consequently, the Zakat liability of individual partner which is to be combined with other zakatable asset owned in the personal capacity:

A will pay 2.5% of $16,000 = $400
B will pay 2.5% of $16,000 = $400
C will pay 2.5% of $16,000 = $400
D will pay 2.5% of $16,000 = $400
E will pay 2.5% of $16,000 = $400

Calculation of Zakat on Land 

Zakat on land is based on the intention and purpose. The following are the five most common scenarios:

  • If a plot of land, house or other asset is purchased with the express intention of selling (trading) it when a suitable offer is received, it is counted as stock in trade.
  • If a plot of land is purchased and designated for the purpose of saving/ investment, it is considered a commercial good and therefore, Zakatmust be paid on it.

Consequently, the market value of the land should be included in the calculation of Zakat for the above cases. However, no Zakat is due until the land is active in the market for sale.

  • If a structure is built and rented out on the plot of land purchased, Zakat is to be paid on the lease rent received from its use and not on the value of the land.
  • If a plot of land is purchased with the intention of building a house for occupation, but later it was intended to sell it, Zakat is not payable until the land is actually sold. The subsequent change of intention will not turn the asset in to a Zakat-payable one.
  • If a plot of land is purchased with the intention of trading, but later it was intended to use it for some other purpose or the idea of trade was simply given up, it would no longer be counted as stock in trade. Zakat is not payable on it after the change of intention.

Calculation of Zakat on Mutual Funds investment

Trading in the stock market through mutual fund companies is basically allowed, as long as they do not guarantee you either the capital or the profit, and as long as the companies whose stocks are being traded engage in Halal business. Zakat rate is 2.5% of the Net Asset Value on the due date. However, if the Zakat is paid based on the fiscal/ Gregorian calendar, then Zakat rate should be calculated at 2.575% to accommodate the 10 extra days difference between the lunar and the Gregorian year.

Case under consideration

There is not enough clarity on the business conducted by the company in which you are a partner, except for the land ownership and mutual fund investments. Based on the information provided, you should pay Zakat either according to your share in business in individual capacity or along with your sisters. The zakat on the business should be calculated based on the information above (under ‘Calculation of Zakat on Business’), to which Mutual funds investment at the Net Asset Value and land value, according to the intention of ownership, should be added to arrive at the total base (presuming that the rentals from land are already reflected under cash balance). From this, you should calculate your share and added to it other zakatable assets possessed in personal capacity (not as part of the business) to calculate total worth of the wealth, on which the Zakat rate should be applied.

(The above answer has been verified by Dr. Main Khalid Al-Qudah, Member of the Fatwa Committee of Assembly of Muslim Jurists in America)

Allahu A’lam (Allah (سبحانه و تعالى) knows best) and all Perfections belong to Allah, and all mistakes belong to me alone. May Allah (سبحانه و تعالى) forgive me, Ameen.

Wassalaam