InvestmentPersonal Finance

Calculating zakat on shares

Ramadan tends to be zakat season, and we’ve been receiving queries on how exactly to calculate the zakat owed on shares. We have discussed this before in this article, but this present article is designed to be a one-stop guide. By the end, you should be clear on how much zakat to pay on your shares.

But before we dive in, you should also definitely download our definitive guide (also footnoting multiple fiqhi positions) on zakat on a range of common investments here.

How hard can it be?

There are broadly 3 main ways in which you can work out how much zakat to pay on your shares.

1. The market value approach;

2. The zakatable assets approach; and

3. The 40% approach.

We’ll go into each route under a separate heading, but there’s an important question to be answered first.

Which of the 3 approaches is suitable for my shares?

The answer to that is that it depends on what your approach to investing in shares is. If you are buying shares with a short-term trade in mine and looking to profit in the short term, then the market value approach is most suitable.

If, however, you buy shares with a view to holding them – and perhaps selling them at some indeterminate point in the future if you’ve turned a nice profit – then the zakatable assets approach or the 40% approach is for you.

You might wish to consult a knowledgeable scholar about which approach to take depending on your circumstances.

The Market Value Approach

This is really quite straightforward. Simply treat the value of your share portfolio in the same way as you would treat cash, and pay 2.5% of the entire portfolio value as zakat.

Remember though, it’s what your shares are worth in the market at the time of paying zakat, not what you bought them for. For instance, if you invested £20,000 in shares and those shares are now worth £25,000, you would pay 2.5% of £25,000, which is £625.

The Zakatable Assets Approach

If you have a longer-term view in mind for your shares, it is accepted that instead of taking the value of your shares as the basis for zakat, what you can do is look into the heart of the company and pay zakat on the zakatable assets of that company.

Generally speaking, the zakatable assets of a company are those things which are liquid – things like cash, stock, etc. You do not pay zakat on illiquid things like property and machinery in a company.

You can look at the liquid assets of a company by looking in their latest accounts. Each company’s account will differ very slightly but will be broadly similar and you can make the analysis in a fairly straightforward manner as all you are looking for are liquid assets.

Let’s look at an example using well-known FTSE100 company AstraZeneca. I haven’t assessed whether or not they are sharia-compliant (see this article on how to do that), but I am using them just as an illustration on how to work out zakatable assets.

You will need to navigate to the assets section of the balance sheet in the accounts. For AstraZeneca, that looks like this:

Looking at the non-current assets, it is clear that none of these are liquid so we can disregard all of these immediately.

Turning to the current assets, we see certain items. These items are reproduced here along with my view on whether these are liquid – and therefore zakatable – or not:

  1. Inventories – liquid;
  2. Trade and other receivables – liquid;
  3. Other investments – liquid (having read note 11);
  4. Derivative financial instruments – liquid;
  5. Income tax receivable – liquid;
  6. Cash and cash equivalents – liquid.

Thus on my analysis, all of the current assets of AstraZeneca are liquid. If you are unsure about whether an asset is liquid or not, read the note to it, and if you are still unsure, either ask somebody qualified or add it in just to be sure.

So we add all those zakatable assets up and it tells us that $13.15bn (£9.88bn) of assets in AstraZeneca are zakatable.

Having worked out what portion of the company is zakatable, we need to work that out as a percentage of the entire company. We do that by taking the current market valuation of AstraZeneca and working out the percentage.

At the time of writing, AstraZeneca’s market capitalisation (its market value, taken as total number of shares in issue multiplied by share price) is £69.4bn (source link). Thus, zakatable assets comprise 19% of the company.

Now let’s say your shares in AstraZeneca are worth £10,000 at the time of calculating your zakat. Again, remember it’s what your shares are worth in the market, not what you bought them for. On £10,000, you 19% of it (i.e. £1,900 is zakatable). You then work out 2.5% of £1900, to give you your final zakat amount on your AstraZeneca shares, which would be £47.50.

Repeat this across your entire share portfolio.

The 40% Approach

This is similar to the above, except that if you do not want to work out the actual number of zakatable assets within a company, you can take a safe approach of saying 40% of the company’s assets are zakatable.

So in the above example of your AstraZeneca shares being worth £10,000, you simply say 40% (i.e. £4,000) of that is zakatable, then work out 2.5%, which would give £100.

I’m personally wary of this approach, as I know that at least one company in my own portfolio had more than 40% zakatable assets. One could argue though that overall, the 40% approach is safe. This will be a personal matter.

Conclusion

So there we have it – the 3 approaches to calculating zakat on your shares!

13 Comments
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13 Comments. Leave new

  • Mohammed Kadir
    May 2, 2020 10:55 pm

    Assalamu Alaikum,

    In your explanation of the “Zakatable Assets Approach”, you mentioned the Current Assets of the company, but you have not mentioned any deduction of the Current Liabilities (liabilities/debts outgoing within the current financial year). Surely this needs to be deducted from the Current Assets to arrive the Net Current Assets (aka the Zakatable Assets) on which zakat of 2.5% is calculated?

    Please clarify.

    Reply
    • Ibrahim Khan
      May 4, 2020 11:17 am

      Good question. Yes that’s right. However we took a cautious approach and we also wanted to make the calculation easier for people. Happy for people to deduct.

      Reply
      • Mohammed Kadir
        May 4, 2020 9:00 pm

        Further to the above query, do we apply this calculation regardless of whether we are expecting to hold or sell the stock within the current financial year?

        Is there any difference to how we treat short-term stock (behaving like a current asset) vs long-term investments (more like a non-current asset)?

        Reply
  • Abdul Fataah
    May 4, 2020 4:51 pm

    Salaam Aleikom brother.
    One question that I cannot answer is if every year I must pay Zakat on the value of the total pots of pensions, savings, and shares or what I have contributed for that year?

    For example, if I had £10k in pensions, £10k in shares, and £10k in savings, and I follow the 40% approach (or simply 1% of all portfolios for simplicity’s sake). Does that mean the following year I have to pay the same percentage again on the total or only on the new money added during the year? Wouldn’t this eat into my static savings and my pension/stocks portfolio year after year as they grow but 1% is deducted yearly of the whole pot including new money? Some years the stocks may rise in value sharply and I pay the larger sum and other years the portfolio declines massively during a recession.

    I would appreciate your help with this question I cannot seem to answer.

    Many thanks

    Reply
    • Mohsin Patel
      May 5, 2020 12:56 am

      You pay zakat on the total. Note that for funds, we use a conservative 40%. NZF (National Zakat Foundation) have conducted research on this and derived a figure of 25% for a proxy of zakatable assets.

      Reply
      • Mohammed Kadir
        May 5, 2020 1:30 am

        Assalamu Alaikum Mohsin Patel,

        A pension pot is not available until the age of 55 which begs the question of why you would pay Zakat on it. You don’t have possession of the pension fund today and nor are you going to receive any dividends/payments from the pension fund within the current financial year.

        On the NZF calculator, it states that debts owed to you are only considered as a current asset (Zakatable) if you are “confident it will be repaid, or you’ve sold something and are due to receive payment, you need to pay Zakat on these amounts.”

        Why would pension funds which are not guaranteed and certainly not receivable anytime soon (just like a debt owed to us but not due to be received) be eligible for Zakat?

        Also, if we are going to include non-current assets like a pension fund then by logical extension, one would argue that we can equally include non-current debts like a mortgage. But clearly we don’t because long-term assets/liabilities don’t reflect our short-term liquidity.

        Look forward to your thoughts on this. Jzk.

        Reply
  • Abdul Fataah
    May 5, 2020 1:35 am

    Salaam brother Mohsin
    I am not sure I fully understood. A good friend of mine said he calculates his on all new money he saves or invests every year as he paid zakat once on the entire capital then only new money year to year. By paying zakat onn all money every year even if the capital is static, wouldnt that simply eat into my capital plus the new money each year? and decreases my capital over time (acts almost the same as fund fee, over 1% over 30 years there is no way you get any real return when you add inflation and expense ratios, investment platform fees, transaction fees etc.)

    Reply
  • Yusuf Qaradawi has argued that equities should be treated analogous to “produce of plowed land”. So zakah is due on the returns of such productive capital, not the capital itself. This approach seems to make much more sense, because over time zakah on capital would mean capital might be eventually whittled away to nothing, impoverishing the holder. Since this is clearly not the case with farmland in the sunnah, why are equities treated differently?

    http://monzer.kahf.com/books/english/fiqhalzakah_vol1.pdf

    Reply
    • Abdul Fataah
      May 10, 2020 11:39 pm

      Salam brother.
      That is what I was thinking (hoping for). Does “return” on equities mean when you sell and realise the gains or if you have paper gain due to market fluctuations? I am down on most of my investments at the moment due to the recent market crash. So Do I pick a date per year and pay zakat on whatever “paper gain” my portfolio shows if the prices of stocks are up that day or of whatever I closed/sold?

      I will have a thorough readthrough of your PDF. Thank you a bunch.

      Reply
  • Asif Dawood Ibrahim
    May 17, 2020 10:40 am

    How did you calculate 19% of zakatable assets in your example

    Reply
    • Mohsin Patel
      May 22, 2020 1:20 am

      It’s laid out in the article – if there’s a specific bit you’re confused about let us know.

      Reply
  • There seems to be a calculation error in arriving at the 19% figure for Astra Zeneca.
    Proportion of zakatable assets against market capitalization for AstraZeneca should be 14%.

    Looks like you have taken the dollar value for the zakatable assets and applied it against a sterling capitalization value.

    The zakat owed on £10000 should therefore be £1400. with a total zakat payment of £35

    Reply

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