How is zakat calculated? On what things is zakat compulsory?

In order to know how to calculate zakat, one must firstly know the meaning of “zakat day” and “zakatable assets”.

• §        “Zakat day”: A person’s “zakat day” is that day of the year according to the Arabic (Hijri) calendar in which he first became the owner of nisab after becoming mature (i.e. after reaching the age of puberty). (Nisab is the value of 612.35 grams of silver. Currently (in August 2012), this is equal to approximately $530 AUD). For example, if the first time you became the owner of nisab was on the 20^th of Sha’ban, then your “zakat day” will be the 20^th of Sha’ban every year.

  Note: If someone does not remember his exact “zakat day”, he should choose the day that he believes is most probably his “zakat day”. If he is unable to determine which day is most probably his “zakat day”, he should choose any day of the year and thereafter that day will be considered his “zakat day” every year. If someone knows the day he became the owner of nisab according to the Gregorian (English) calendar but not according to the Arabic (Hijri) calendar, he should convert the English date into Arabic date using a software designed for this (available on some websites).

• §        “Zakatable assets”: Zakatable assets are the following assets:
  • o       cash
  • o       gold
  • o       silver
  • o       merchandise (i.e. anything bought with the intention of resale)

After understanding the above, one should then know that it is compulsory to pay zakat every year at the rate of 2.5% of the total value of the “zakatable assets” that one owns on his “zakat day”. In other words, when one’s “zakat day” comes, he should calculate the total value of his “zakatable assets”. If this (total value of his “zakatable assets” on his “zakat day”) is equal to or more than the nisab, he should give 2.5% of that in zakat. On the other hand, if it (total value of his “zakatable assets” on his “zakat day”) is less than the nisab, he does not have to pay zakat.

For example, if your “zakat day” is the 20^th of Sha’ban, then every year on the 20^th of Sha’ban, calculate the total value of your “zakatable assets”; thereafter, you must give 2.5% of that in zakat. Hence, if this year on the 20^th of Sha’ban the total value of your “zakatable assets” was $10,000, then you must give $250 in zakat this year. If next year on 20^th of Sha’ban the total value of your zakatable assets is $20,000, then you must give $500 in zakat next year.

It does not matter how much “zakatable assets” you own before or after your “zakat day”. For example, two days before your “zakat day” you owned $15,000, but on your “zakat day” you only owned $10,000, then you will have to give zakat on $10,000, not $15,000.

It does not matter how long one has had a particular “zakatable asset” for. If he owns it on his “zakat day”, he will have to pay zakat on it. For example, on his “zakat day”, someone has some gold or some cash that he acquired only one day ago. He will still have to pay zakat on them.

If a person is in debt, then he should deduct the amount that he owes from the total value of his “zakatable assets” in order to calculate zakat. For example, the total value of your “zakatable assets” is $10,000 on your “zakat day”. However, you owe someone $2,000. You will have to pay zakat on $8,000, not $10,000.

Note: For long term loans, only deduct the amount that is payable within one year from your “zakat day”.

If the total value of one’s “zakatable assets” on his “zakat day” is less than the nisab, he will not have to pay zakat.

If a person bought something with the intention of resale, it will be considered merchandise and zakat will be compulsory on it. If someone bought something for personal use and later on he decided to sell it, zakat will not be compulsory on it.

When evaluating gold, silver and merchandise for calculating zakat, one should look at their selling price (i.e. the price they could be sold for) on his “zakat day”. One should not look at how much he bought them for.

Summary:

In summary, the formula for calculating zakat is:

   Amount of Cash

+ value of gold

+ value of silver

+ value of merchandise

– debt owed to someone

X 0.025

For example, on his “zakat day”, Zaid had the following “zakatable assets”:

Cash: $5000

Gold valued at: $3000

Silver valued at: $1000

Merchandise valued at: $2000

At the same time, he owed someone $2500

Zaid will calculate the zakat amount that is due on him thus:

   5000 (cash)

+ 3000 (value of gold)

+ 1000 (value of silver)

+ 2000 (value of merchandise)

– 2500 (amount he owes someone)
———–

=  8500 (This is the amount that zakat is payable on)

———–
X 0.025 (This is to work out 2.5% of the above amount (i.e. 8500))
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=  212.50 (This is the amount that Zaid needs to pay as zakat)

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Hopefully, the above has clarified the basics of zakat.