Ramadan is almost upon us and is usually the time when most Muslims pay their zakat for the year. To make things easier for you, we are doing a series on how to calculate zakat on different asset classes.
In this article, we will break down and demonstrate how to calculate your zakat due on any shares that you own.
Is zakat due on shares?
Yes. A share represents a proportionate ownership of a company and as such any zakatable assets that the company holds will incur zakat.
What zakatable assets are in shares?
There are two broad ways to determine how much zakat is due on your shares which depend on your investing approach.
The Market Value Approach
If you purchased shares in a company with a short-term trade in mind, then you should treat the entire value of your investment in the same way that you would treat cash. Therefore you would just pay 2.5% on the total investment value at the time of paying zakat.
The Zakatable Assets Approach
If you purchased shares with the intent to hold for the long term, your zakatable assets are simply the liquid assets that the company holds. Liquid in this case just means cash or something easily converted to cash like stock and receivables. Examples of non-liquid assets would be things like property and goodwill which are not easily converted to cash.
Here is a step by step guide on how to find out the zakatable assets for a company and use this to work out how much zakat is due:
- Open the company’s latest annual report. This will be available in the investors section of their website.
- Once open, you turn to the balance sheet.
- Now add up all of the liquid assets in both the non-current assets and current assets section.
- If in doubt as to whether an asset is liquid, add it in.
- Work out the total market capitalisation of the company. This is simply the total number of shares multiplied by the share value. (A quick google search could give you this).
- Now take the total value of liquid assets and divide by the total market capitalisation of the company. This gives you the percentage of your investment upon which zakat is due.
- Apply this percentage to your total investment value.
- Finally, pay 2.5% zakat on what is left.
Note: If for whatever reason you do not want to work out the actual proportion of zakatable assets that a company has, you can instead simply assume that 25% of the companies’ asset are zakatable. You then simply apply 2.5% to 25% of your investment value. However we would personally recommend actually working out the percentage of zakatable assets for each company.
Zara has £2000 worth of AstraZeneca stock on her zakat anniversary (the date upon which she pays zakat). If her intention is to flip this stock in the short term for a quick profit, then calculating the zakat due is simple. Just take 2.5% of the full £2000, which comes to £50.
However if she intends to hold the shares for the long term, she has to work out the zakatable assets of the business. Here’s how she would do it:
- She googles “AstraZeneca annual report” which takes her to their annual report section. We can see that the latest report at the time of writing is for the year 2020.
- We open this and jump to the balance sheet which is also referred to as the consolidated statement of financial position (page 177 of the report).
- Now we sum all the liquid assets from the non-current and current assets section.
First we take all the current assets ($19,544m). The non-current assets are slightly less straightforward. In this case, we take the financial instruments (this doesn’t look permissible but let’s ignore it for now), other receivables and deferred tax assets and to be safe we also include the investments. This comes to $5476m. The total zakatable assets is therefore $19,544m + $5,476m = $25,020m.
- A quick search on yahoo finance reveals that the current market cap at the time of writing is $129.78b. (Tip: Make sure that the market cap and asset figures are in the same currency).
- Now we simply calculate $25,020m/$129.78b which gives us a percentage of 19.3%.
- Finally, we apply this 19.3% to Zara’s £2000 worth of AstraZeneca stock, which gives us a zakatable value of £386.
- Zara will simply pay 2.5% of zakat on this £386, which is £9.65.
Where to calculate your zakat
So there we have it. Here is a simple and easy way to calculate your zakat using our comprehensive zakat calculator.