Zakatonomics

the Divine
Economic
System
Understanding Almighty
Creators Master-Stroke in
Economics & Financial
Management
Arif Jameel
Published by FastPencil
Copyright 2013 Arif Jameel
Published by FastPencil
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Suite 210
Campbell CA 95008 USA
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Since this book is based upon various communication between the author and his research and readings, it is highly possible that during the
course of answering some of the queries, one may have taken some sentences and references verbatim from similar or related responses.
The Author is a student of Islam and does not claim to be a scholar or master of any sorts in this subject. The views expressed are purely
from a logical standpoint, and based upon reason and research, which may or may not appease certain readers.
Also this book is not meant to be about any specific sect or religious thought, but is based upon most common and consential views of the
Scholars at large.
This book is a living document touching upon the basics of Zakat and wealth distribution system. There are no specific royalties or copy-
rights on this material. You may freely distribute the contents once you have informed the author of your intentions.
The Publisher makes no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifi-
cally disclaim any implied warranties of merchantability or fitness for a particular purpose. Neither the publisher nor author shall be liable
for any loss of profit or any commercial damages.
Printed in the United States of America.
First Edition
To the Almighty Lord, whom we call Allah

Acknowledgments
I thank Allah Almighty for making me what I am today, and
my parents for enabling me to be worthy of understanding the
purpose of life, and guiding us through the tender years.
To my family and kids for their unstinting support in letting
me go about this work, without much ado.
To all the brothers and sisters who over the years have written
to me with their various queries on Zakat, which has helped me
look into uncharted areas, which otherwise would have been
overlooked. Special thanks to Brother Burhan of Islamhel-
pline.com, for the excellent and simplistic replies to various
queries, which I have used as the basis for some of my examples.
Contents
Chapter 1 Zakat - The Islamic mandate on wealth distribution . . . . . . . . . . . . . . . . . 1
Chapter 2 Concept of Wealth in Islam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Chapter 3 Concept & Principles of Buying and Selling in Islam . . . . . . . . . . . . . . . . 7
Chapter 4 Is Zakat a Charity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Chapter 5 Zakat-ul-Maal and Zakat-Ul-Fitr . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Chapter 6 Nisaab - The measure of Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Chapter 7 Who is Eligible to Receive Zakat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Chapter 8 Difference between TAX and Zakat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Chapter 9 Should Zakat be paid on Previously paid wealth? . . . . . . . . . . . . . . . . . . . 31
Chapter 10 Zakat on 401K, Provident Fund & Gratuity . . . . . . . . . . . . . . . . . . . . . . . . . 33
Chapter 11 Zakat on House Mortgages and Car Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Chapter 12 Zakat on Property Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Chapter 13 Zakat on Loans given to Friends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Chapter 14 Who Should pay Zakat on Wifes Gold Ornaments . . . . . . . . . . . . . . . . 43
Chapter 15 The Calculations of Zakat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
1
Zakat - The Islamic mandate
on wealth distribution
The word Zakat (zakaah) is an Arabic word and by defini-
tion it stands for Purification. In a broader canvas the
meaning encompasses the process and means of attaining
purification. In our real lives, this relates to both individual
and collective purification of our wealth, by sharing a small
portion of it with the poor, needy and destitute sections of
the society.

Significance of Zakat
Zakat is the core of the foundation of a beautiful and balanced
Economic system ordained by our Creator for eradicating pov-
erty, redistributing wealth and controlling our greed for wealth.
It helps in the circulation of economic wealth, which in turn
feeds the poor, and builds upon social relationships, instilling
the humane values of caring and sharing, thereby building a har-
monious, inclusive society as it nucleus.
1
Islam has a much broader canvas than the traditional defini-
tion of religion. It encompasses and lays out clear policies, pro-
cesses, procedures and guidelines for every activity in our lives.
The Holy Quran, is not just a book of religious code and wor-
ship (theology), but a complete guide to the way of life. Its a
manual for humanity and provides a system of values related to
every aspect of individual and public life. The Quran, has direc-
tives and narratives on Theology, History, Astronomy, Eco-
nomics, Sociology, Sciences, Governance, Law, Medicine, etc.
In short it encompasses the complete way of life, from cradle to
grave.
In this book we will consider the socio-economic impact of
Zakat, which forms one of the five fundamental pillars of Islam.
It will help us to understand how the economic system allows
for distribution and the flow of wealth between various sections
of the society. Zakat is a highly practical and scientifically
derived system and its beauty is that it does not cause any
burden on the payer, unlike the Taxation system prevalent
today. Its not akin to tax, but a simple sharing system, ordained
only upon the wealthy, to contribute a small, insignificant por-
tion of their accumulated wealth (about 2.5%), within the rela-
tives, neighbourhood and members of the society who are eco-
nomically less-fortunate.

Why this burden of Taxation?
Zakat is not burdonesome on any individual, since its not
based on income, rather than on accumulated, unutilized
wealth! This is the divine science on which Zakat is based. This
small percentage helps the flow of funds from the haves to the
have-nots in the family and society. It helps in continued stimu-
2 Zakatonomics the Divine Economic System
lation of social well-being and helps each one of us to instigate
our humanitarian element, by relating to the sufferings and
hardships among the society. It also helps in eradication of con-
centration of wealth, which is the biggest problem that the capi-
talist, corporate world is facing today. It reduces our greed
factor and inculcates the art of giving from what we own,
thereby bringing us closer to each other and empathizing with
the poor and destitutes, the have-nots and the less-privileged.
The mere act of giving also adds to the basic fulfilment of our
soul, helps us lead happier, fulfilling and sensible lives - at the
same time it spreads betterness amongst our families and com-
munities and societies, at large. The western materialistic world
inculcates a culture of greed, self-centeredness and focus on
individual. Islam advocates community building, rather than
individual building. It instigates us how to think in terms of
We rather than Me, Us rather than I, Our rather than
Mine.

Modern-day Slavery
In this world of corporate greed, the fruits and dignity of
labour are not justifiably spread. The gulf between the workers
and a handful of corporate executives is so wide, that it builds
resentment, anger and hatred. The rich keep getting richer at a
much higher rate, and rest get poorer and deteriorate, by each
passing day. In addition the free market and capitalist societies
build up of a state of illusion, where human beings are all meas-
ured on the amount of wealth they have ammassed and the
material objects-of-desire, they possess. This degeneration
leads to sanctifying and legalizing of all forms of Riba and
Usury, which is the main cause of the downfall of the economies
Zakat - The Islamic mandate on wealth 3
the world over. Islam for this very reason, strictly condemns
Riba in all its forms, including Banking Interest. If we look
around us in the developed worlds, the vast majority of the pop-
ulace are drowned in debts, which they would only be able to
pay off by continuing to work and toil for the rest of their lives.
This amounts to modern day slavery - A slave of the Banking
and Financial system, for life.

Purification and Insurance.
Other than the obvious social and economic benefits, Zakat
also purifies and insures our wealth. Who other than the
Almighty Lord, Allah, would be a better insurer! Its his promise
that any wealth on which Zakat is diligently paid for will remain
safe and secure and will not come in harms way and perish.
The earth does not have permission to swallow, neither does
the fire have the sanctity to burn, nor the water to drown, any
wealth on which zakat has been duly paid. Can we find a more
simpler, more beautiful and better system which offers, protec-
tion, insurance, spread and distribution of wealth in this world?
The answer is obvious, because we have taken to other forms of
remedies which are not divine and are bound to be flawed. Only
the system ordained by the Almighty Allah can be divine and
flawless. Its timeless and Perfect.
4 Zakatonomics the Divine Economic System
2
Concept of Wealth in Islam
Wealth and wordly possessions in Islam, are considered as a
gift from Allah, our creator and cherisher. We are tempo-
rary custodians of this wealth. We are entrusted in what-
ever we have received and gained, and our role is limited to
a Managing Trustee. We have been born without owning
anything. Allah has gradually granted us with several means
of livelihood and economic wealth. We have often heard
the saying Al Mulku Lillah - which means that the total
ownership of everthing we possess, belongs to Allah. He is
the supreme and total Owner. We are guided to act in
accordance to His divine laws and ordainments. Allah has
provided clearly defined Divine codes of practice on how to
obtain wealth, how to administer that wealth, where to
spend and how to promote it for social and public benefit.
This is a fundamental viewpoint of Muslims and Islam,
which is a very important paradigm differentiator between
the common worldly understanding of wealth, and how
5
Islam deals with its - ownership, acquisition, distribution
and accountability.
Once we understand and digest the fact that we are not the
actual owners of the wealth we possess, it becomes very easy for
us to follow the divine instructions laid down by Allah, on how
we acquire wealth, how we administer it, and how we spend it.
This also diminishes the element of greed that we see all around
us in this world. We are responsible for our sources of income,
and also our spending, within the marked guidelines of the
divine laws ordained by Allah also known as Sharia.
The hadith below foretells that on the day of judgement a
person will not move from his place unless he answers the fol-
lowing questions.
A slave will not be able to take a step further on the Day of
Requital until he is taken to account for the following things: his
time and how he spent it, his knowledge and how he used it, his
money and how he earned and spent it, and his youth and how he
passed it. (Tirmidhi)
Wealth owned must also be spent in good ways as ordained
by Allah in the Quraan:
Righteousness is not that you turn your faces toward the east or
the west, but [true] righteousness is [in] one who believes in Allah,
the Last Day, the Angels, the Book, and the prophets and gives
wealth, in spite of love for it, to relatives, orphans, the needy, the
traveler, those who ask [for help], and for freeing slaves. (Chapter
2:177)
6 Zakatonomics the Divine Economic System
3
Concept & Principles of
Buying and Selling in Islam
Islam looks to wealth as a bounty from Allah the Almighty
Creator. We are ordained by Him, not to neglect or
renounce it, like the monks and hermits do. Almaalu wal
banoonu bi Zeenat ul hayat tud duniya - The Wealth and
Children are the bounties and beauties of this world. They
are precious, and also form a part of the trust and test from
Allah.
Buying and Selling (trading) is the core of Socio-Economics,
be it in the form of Barter, Currency exchange or Electronic
trade. Trade is encouraged in Islam. But we are allowed to sell
and buy only that which has been lawful (Halaal) for us. For
example, we are not allowed to trade in Alcohol, which is
harmful to an individuals health, encourages evil actions and it
does not provide any real benefit to the society. Similarly there
are several business areas which we are prohibited to get
engaged for trade and business promotion, which ultimately
7
lead to disruption and corruption in Individuals, Families,
Society and Humanity at large.

Allah has made trade lawful and Interest (and usury) unlawful.
Allah deprives riba of all His blessings and develops (blooms)
charity, and Allah does not like an ungrateful, sinful person
(Quran: 2:274-276)

Islam discourages abstention or hermitic isolation and favors
Economic trading activities. Nonetheless, Islam does not allow
us to make seeking livelihood and earning wealth as the highest
priority and concern in our lives. Islam outlines the key princi-
ples and ethics of trade such as fairness, sustainability, equity
and workers rights. This is the fundamental difference between
materialistic Economics and Islamic Economics. The city of
Mecca, the birthplace of Islam, was the center of commerce and
the early Muslims were not only engaged in trade but they often
went to distant lands in connection with business. Prophet
Mohammed (PBUH) was himself a trader known for his trust-
worthiness and integrity in his dealings. There are several teach-
ings of the Prophet (PBUH) that deal exclusively with sales,
trade and commercial transactions. We will briefly examine
some of these basic principles here.

Fairness and Equity.
The concepts of fairness, equity, mutual respect and consider-
ation for others are inherent in the fundamental teachings of
Islam an integral part of business dealings between buyers and
sellers, and between employers and employees. This means that
self-interest only has a place in the community in as much as it
8 Zakatonomics the Divine Economic System
takes into account the interests of others. We are therefore not
allowed to undertake an action or instigate a business transac-
tion that will cause greater harm than benefit to the community
or environment. Intentions are of primary consideration and
any transaction or activity that is perceived to be harmful to the
other, even if it results in significant wealth to the seller is con-
sidered unlawful.

The Prophet Mohammed (PBUH) accorded great honor and
gave glad tidings to honest and ethical traders as below:
A truthful and trustworthy merchant will be in the company of
the Prophets, the Upright and the Martyrs - Tirmidhi.
Allah shows mercy to a man who is kind when he sells, when he
buys and when he makes a claim - Bukhari.

Allah (SWT) also instructs us in the Quraan as follows:

Give full measure and full weight in justice, and wrong not
people in respect of their goods (Quran: 11:85)
Woe to those that deal in fraud. Those who, when they have to
receive by measure from men, exact full measure. But when they
have to give by measure or weight to men, give less than due. Do they
not think that they will be called to account? (Quran: 83:1-4)

Social Justice & Equality
Along with Fairness and Equity the concept of social justice is
paramount in Islam. Social justice includes a fair and equitable
distribution of wealth as well as protection of the weak from
economic exploitation by the strong. Allah (SWT) commands
Muslims to stand firm for justice at all costs:
Concept & Principles of Buying and Selling 9

O ye who believe! Stand out firmly for justice, as witnesses to
Allah, even as against yourselves, your parents, or your kin, and
whether it be (against) rich or poor: for Allah can best protect
both. (Quran : 4:135)

Our trades should be based on just social relationships
between producers and workers, as well as between buyers and
sellers. Islam instructs us to defend and pursue just economic
relationships free of interest and usury (unfair profiteering).

Hoarding, Coercion and Exploitation
Taking advantage of someones plight, or hoarding and cre-
ating artificial supply shortages and charging a high price is con-
sidered exploitation and as such forbidden in Islam.
Islam encourages mutual consent between parties as a neces-
sary condition for a valid business transaction. It follows, there-
fore, that a sale under coercion is not acceptable in Islam.

Fair Treatment of Employees & Dignity of Labour
Islam encourages fair trade principles on the fair treatment of
workers. Although Islamic law allows everyone the right to enter
into any lawful profession or occupation and to conduct any
lawful trade or business, there are several key principles that
guide the treatment of workers. Firstly, there must be clear and
proper contracts, preferably written ones. Secondly, all agree-
ments whether oral or written must be clear, transparent, just
and lawful. And lastly, employees should know their duties and
responsibilities and be informed of their rights in terms of holi-
days and other allowances. It is the duty of both the employers
10 Zakatonomics the Divine Economic System
and the employees to fulfil their agreements to the best of their
capacities, for the Quran states:

O you who believe, fulfil your contracts (Quran 5:1).

The dignity of workers must be respected. Importantly, no
work should be considered menial or degrading and they should
be treated with dignity and honour and have a humane and safe
environment for work.

Prophet Mohammed (PBUH) said, Your brothers are your
responsibility. Allah has made them under your hands. So whoso-
ever has a brother under his hand, let him give him food as he eats
and dress as he dresses. Do not give them work that will overburden
them and if you do give them such task then provide them with assis-
tance (Bukhari)

Conclusion - Guidance on Earnings and Spendings
We are ordained not to get into excessive (undue) profita-
bility, Interest based transactions and income nor engaging or
supplementing any non-halaal buisnesses, Forward & Specula-
tive trading, hoarding of goods. Honesty and transparency in
dealings, truthful declaration of saleable goods, giving workers
their timely wages and protecting their rights, is encouraged at
all levels. Thus our wealth has to be free from all evil, and
should not have caused any harm to the society at large.
Similarly, when it comes to our spendings, we are ordained
not to be wasteful or extravagant, not to engage in non-halaal
activities, not to be a miser, etc. We are heavily encouraged to
be charitable and voluntarily give substantial portions of our
Concept & Principles of Buying and Selling 11
wealth to the poor, needy and the destitutes of our society.
One of the ordainment which is mandatory is Zakat, which is
the core subject of this book.
12 Zakatonomics the Divine Economic System
4
Is Zakat a Charity

Every religion has preached charity. However, the elevation
of Zakat in the Islamic law and its economic hierarchy has given
philanthropy and charity a dimension of mandatory rights and a
statue of regularity. Zakat as assumed a prominence and perma-
nence, which is not encountered in any other socio-economic
structure. Islam has introduced a novel integrated model of
obligatory monetary transfer from the haves to the have-nots
according to divine mathematical calculations. This transfer
results in a regularized financial moderation and prevents the
formation of the critical gap between the wealthy and the poor.
Zakat is a full process, which results in the sanctification of the
individual and a purification of his/her wealth and helps build a
society of sufficency and security, which is the ultimate aspira-
tion of humanity as a whole.
There are divine codes of practice on how to obtain wealth,
how to administer that wealth and promote it for public benefit.
Allah also instructs that part of that wealth is the Divine Right
13
of Allah to be distributed according to a divine fomula on the
percentage and the channel where it should be spent.
The channels of expenditure are all directed to the social and
economic security of the less fortunate individuals of the
society. This system of Zakat has proved to be the most prac-
tical and dignified methodology by which the poor elements of
the society possess a right in the wealth of the affluent.
Zakat is not a charity, it is a right of the less-fortunate and des-
titutes, by Divine sanction.

14 Zakatonomics the Divine Economic System
5
Zakat-ul-Maal and Zakat-Ul-
Fitr
Zakat-al-Maal commonly called as Zakat refers to the
annual obligatory charity which every believing man,
woman, or child who is blessed with sustenance above the
prescribed Nisaab is obligated to pay. This Zakat is con-
sidered to be one of the five inviolable pillars of Islam. This
book is dedicated to the various aspects of Zakat-al-Maal
and its related discussions. You will find below some defi-
nitions and information related to Zakat-Ul-Fitr.

Zakat-ul-Fitr
Zakat ul-fitr is the nominal charity which every believer is
obliged to pay on his and his familys behalf, once a year,
towards the end of the month of Ramadhan. Its given in the
form of dates, or barley or wheat or raisins, to needy believers in
the community so that they are made free from wants on at least
this one day of Eid Ul Fitr. Its purpose is to ensure that all the
needy and the poor in the society around us do not go hungry or
15
left wanted, when all of us are celebrating the end of Fasting,
and for this reason this Eid is also termed as Eid Ul Fitr.

This was made obligatory by our Prophet Muhammad
(PBUH), upon all believers in the month of Shabaan of second
year of Hijrah. Its primary purpose was to purify the ones who
fast, from any inadvertent mistakes which may have taken place
through their acts or speech, during the fasting month. The
social benefit is to ensure that the poor and needy do not starve
on this day of Eid. This view is based upon the hadith reported
by Abu Dawud, Ibn Majah, and ad-Daraqutni from Ibn Abbas.
The Messenger of Allah (saws) enjoined zakat ul-fitr on the one
who fasts to shield ones self from any indecent act or speech
and for the purpose of providing food for the needy.

Hadith Related to Zakat Ul Fitr. (Sahih Al-Bukhari Hadith
2.579)

Allahs Messenger (saws) enjoined the payment of one Sa of
dates or one Sa of barley as Zakat-ul-Fitr on every Muslim: slave or
free, male or female, young or old, and he ordered that it be paid
before the people went out to offer the Eid prayer.
Al-Baihaqi and ad-Daraqutni relate: The Messenger of Allah
(saws) enjoined the zakat ul-fitr, and also said: Free them (the
poor) from want on this day.

Because the payment of Zakat-ul-fitr is determined by the
weight of food, it is possible that the exact amount might differ
slightly from country to country based on the cost of that food
in their country, but in most nations it is calculated to be
16 Zakatonomics the Divine Economic System
between US$5.00 to US$8.00 per person in the family and
household.
It is accepted as zakah for the person who pays it before the
Eid salah, and it is sadaqah for the one who pays it after the
salah.

Unlike Zakat Ul Maal, which is obligatory on only the owner
of the wealth above Nisaab, Zakat Ul Fitr is obligatory on the
guardian of the family and calculated once for each and every
member of the family, including the kids and newborn. Its such
a noble thought and cause, that we should try and ensure that
this is given duly on time to the needy ones around us, so that
they are included in the celebrations of Eid Ul Fitr.
Zakat-ul-Maal and Zakat-Ul-Fitr 17
6
Nisaab - The measure of
Wealth
For any economic system to be timeless, there has to be a
formula which clearly defines the line between poverty and
affluency. Nisaab is the cut-off point which draws that line
between the haves and have-nots. Islam has based this on
real currency of Gold and Silver, as these get inflation
adjusted automatically over time.
If a believing individual, possesses gold (equivalent to about
86 gms) or Silver (about 595 gms) or its equivalent value, in any
other form (cash, etc), then zakat is liable on him/her. Gener-
ally silver is lower in comparative value, so if you are calculating
cash or cash equivalent, then one has to find the current market
rate of silver and arrive at the Nisaab accordingly for 595gms).
This becomes the cut-off value for Nisaab.
Once the level of Nisaab is crossed, then zakat has to be paid
on the entire wealth, and NOT on the total wealth minus
Nisaab. e.g. if you possess 100gms of gold, then zakat is to be
19
calculated on the total 100gms and not just on the difference
100-86 (14 gms).

20 Zakatonomics the Divine Economic System
7
Who is Eligible to Receive
Zakat
While the Almighty Allah, has ordained who should pay
Zakat, there are clear directives and criteria on those who
are eligible to receive Zakat. There are eight groups of
people on whom Zakat should be spent, as mentioned in
the Quran:

The alms are only for the Fuqara (the poor), and Al-Masakin
(the needy) and those employed to collect (the funds); and for to
attract the hearts of those who have been inclined (towards Islam);
and to free the captives; and for those in debt; and for Allahs Cause,
and for the wayfarer (a traveler who is cut off from everything); a
duty imposed by Allah. And Allah is All-Knower, All-Wise. [Al-
Quran 9:60]
They ask you as to what they should spend. Say: Whatever
wealth you spend, it is for the parents and the near of kin and the
orphans and the needy and the wayfarer, and whatever good you do,
Allah surely knows it. [Al-Quran 2:215]
21
(Alms are) for the poor who are confined in the way of Allah
they cannot go about in the land; the ignorant man thinks them to
be rich on account of (their) abstaining (from begging); you can rec-
ognize them by their mark; they do not beg from men importu-
nately; and whatever good thing you spend, surely Allah knows it.
[Al-Quran 2:273]
And give to the near of kin his due and (to) the needy and the
wayfarer, and do not squander wastefully. [Al-Quran 17:26]

1. Fuqaraa: Those who own property and wealth in excess of
basic necessities but below the value of Nisab.
2. Masakeen: Persons of extreme poverty who possess no
wealth whatsoever. They are the destitutes.
3. Aamileen: (Zakat collector) Those persons who are
appointed by an Islamic Head of State or Government to collect
Zakat. It is not necessary that this be a needy person.
4. Muallafatul Quloob: Those poor and needy persons who
are given Zakat with the intentions of solidifying their hearts
because they maybe recently converted to Islam or to bring
them closer to Islam.
5. Ar-Riqaab: Slaves whose masters have agreed to set them
free on a payment of a fixed amount. Zakat may be used to pur-
chase their freedom.
6. Ibnus-Sabeel: A traveler, who, whilst wealthy at his place
of residence, is stranded and in need of financial assistance.
7. Al Ghaarimeen: A person whose debts exceeds his assets
and his net assets (after deducting his liabilities) is below the
Nisab limit. To determine whether a person qualifies, his basic
necessities of life (house, furniture, clothes, vehicle, etc.) will
22 Zakatonomics the Divine Economic System
not be taken into account. It is conditional that the debts were
not generated due to any un-Islamic or sinful act.
8. Fi Sabeelillah: Those who are away from home in the path
of Allah. Those in Jihaad, those seeking knowledge or a stranded
Haji may be assisted with Zakat if they are in need.

Who cannot be given Zakat?
1. Zakat cannot be given to parents, grandfather, etc., or to
ones children and grandchildren. A husband and wife cannot
give Zakat to each other.
2. Zakat contributions cannot be given to such institutions or
organizations who do not give the rightful recipients (Masaarif)
possession of Zakat, but instead use Zakat funds for construc-
tion, investment or salaries.
3. Zakat funds cannot be given to non-Muslims, although
other forms of charity can be given to them. The same ruling
applies to Waajib Sadaqah, i.e., Sadaqatul Fitr, Kaffarah, Ushr
and Nazr. Nafl Sadaqah could be given to non-Muslims.
4. If one cannot determine whether the recipient is needy or
not, then it is better to make certain before giving him Zakat. If
Zakat is given without inquiry and subsequently it is known that
the recipient is wealthy then the Zakat is not valid. It has to be
re-paid to the needy, once again.
5. Zakat will not be fulfilled by purchasing books for an insti-
tution, or land purchased for public utility and made Wakf.
There are other Charity and Sadaqahs for this purpose.
6. Zakat cannot be used for the Kafn of a deceased person
who has no heirs, because at that time he/she cannot become
the owner.
7. A dead persons debt cannot be paid from Zakat.
Who is Eligible to Receive Zakat 23

Some Additional Queries on Zakat Payments
1. It is not permissible according to Shariah to give Zakat to a
person who owns merchandise or wealth in excess of his needs
to the value of Nisab nor is it permissible for such a person to
accept Zakat.
2. A person that does not own an amount equal to the value
of Nisab is known as Faqir. This person could be given Zakat
and it is permissible for him to accept it.
3. If a person owns wealth which in value exceeds the amount
of Nisab, but this wealth is not intended for business nor does
he require it for his daily needs, such a person is regarded as
well-to-do and should not be given Zakat.
4. The books of a scholar or tools of a tradesman are among
his necessities, irrespective of their value. Besides these if he
does not own wealth equal to Nisab, he could be given Zakat.
5. When giving Zakat, Sadaqah, etc., ones poor and needy
relatives should be given preference. To avoid embarrassing
them, it should be given to them without saying that it is Zakat
or Sadaqah.
6. There is great thawab (reward) in giving Zakat to poor per-
sons who are striving in the way of the Deen or those who are
engaged in religious knowledge, or to religious institutions
where poor or needy students are being cared for. Care should
be taken that only such institutions are given Zakat where it is
used according to the Shariah.
7. A child of a wealthy father cannot be given Zakat. When
such a child becomes mature in age, and does not own wealth to
the value of Nisab, he may then be given Zakat.
24 Zakatonomics the Divine Economic System
8. Zakat can be given to: brother, sister, nephew, niece
(brothers and sisters children), uncle, aunt (both paternal and
maternal), step-grandfather, step-grandmother, father-in-law,
and mother-in-law.

Who is Eligible to Receive Zakat 25
8
Difference between TAX and
Zakat
There is a fundamental and a more humane differentiation
on how modern day Taxes and Zakat differ. Zakat is paid
on the excess wealth, of a person, after all his basic necessi-
ties are catered and paid for. Taxes are deducted directly
from ones Income, irrespective of the expenses and the
needs of the earner. Zakat is paid on a persons wealth and
and never on income. It is a form of Thank-you-my-Lord
for providing me in excess of my needs and requirements.
Secondly this helps the economic balance and flow of
wealth to the needy and the poor.
Thus there is no Zakat directly on Salary. It is only on what
one is left with after making room for his and his familys liveli-
hood.
On livelihood, there are those who question on what is the
line between luxury and needs! What do we consider a neces-
sity for livelihood and what falls outside of it. I think we should
27
follow the basic guidelines but one has to leave this on an indi-
viduals judgement, for it is the individual who will ultimately
face Allah. In all cases, excessive unnecessary spending, which
may be termed wastage is called Israaf in Islam, which is for-
bidden. If the intention is to reduce ones zakat payments, then
Im sure we can find many excuses to classify luxury as necessity.
However, the thumb rule is that zakat is calculated on an indi-
viduals wealth!! Also 2.5% is the minimum, and need not be
limited exactly to 2.5%.

How is this different from the capitalist system.
Capitalist economic system does not care for families or for
how one leads his life. It mandates a deduction of tax at source
on a monthly/annual basis, as the case may be in each country.
The taxes deducted usually range beteen 30%-55% of the indi-
viduals income. Whereas Islamic economic system takes a very
small portion (2.5% ) of the leftover (accumulated) wealth of an
individual which has stayed with him/her over a period of one
full year. Thus you can see how un-burdening is this formula,
both from quantitative as well as practical perspective. You pay
only if you save, and in case you had to spend all of what you
earned, then there is no Zakat.
Islamic way is highly scientific, practical and effective: Example:
Qassim earns $80,000 per annum from his job and his wife is
a homemaker. They have one child and no other liabillities or
responsibilities and end up saving 25,000 every year. His friend
Khalid earns $90,000 and his wife is a homemaker. They have 4
kids and have their parents to be taken care of . They end up
saving only 5,000 every year.
28 Zakatonomics the Divine Economic System
Qassim pays lesser taxes than Khalid, although he saves a lot
more, and Khalids expenses are much higher as he has to take
care of his larger family.
In Islam, this differentiation is accounted for, and Khalid pays
less because he saves less and Qassim pays more because he is
able to save more. Subhanallah!!
Difference between TAX and Zakat 29
9
Should Zakat be paid on
Previously paid wealth?
QUESTION: If the zakat is paid on the jewellery and prop-
erty or cash balances in a given year, and if there is increase
in its value, do we still need to pay zakat on the same next
year?
ANSWER: Yes, Zakat has to be paid annually on all the accu-
mulated wealth, even if you have already paid the zakat on it ear-
lier. This is like the thanksgiving to Allah for having given you
the wealth and maintained it for one full year. Traditional
worldly taxation system is based on a hefty portion of the
income and not on savings (wealth) of a person. Zakat is calcu-
lated only at 2.5% of ones savings. This does not create any
burden on the payer, and it helps to serve a bigger and better
cause than the taxes that many governments impose. Of course
an economic system ordained by the Creator himself, is bound
to be flawless and much more superior than the manmade taxa-
tion system.
31
10
Zakat on 401K, Provident
Fund & Gratuity
Zakah as per our Shariah, is only applicable on ones excess
wealth, if it has been in ones possession for a period of one
full lunar calendar year. Since you have not actually
received your gratuity, and neither was it deducted from
your salary, you obviously do not have possession of that
portion of your asset - thus you will NOT be liable to pay
zakat on it until you actually receive it and the amount has
been in your possession for a period of one full lunar cal-
endar year. Hence there is no Zakat payable on the accrued
gratuity, as its only notional, until the day its received.

Zakat on Provident fund / 401K / Pension Plans
Provident Funds and Pension plans have two portions of sav-
ings attributed to it.
A) This is a compulsory (mandatory) portion which is
deducted from the salary and generally matched in equal
33
measure by the employer, and this amount is deposited into the
FUND/Plan.
B) There is a second voluntary (non-mandatory) portion
which one can opt-in to voluntarily deduct an excess amount
every month, as a savings for future maturity.

There is NO zakat on the (A) portion above.
Zakat should be calculated at 2.5% on the accumulated total
(B) portion.
The main reason for zakat being applicable on B portion is
that this amount has been voluntarily kept as savings by the
employee and it was never mandatory on him/her.

EXAMPLE on PROVIDENT FUND
QUESTION: My query is on Zakat payable on Provident
Fund. I have my PF contribution in company since last 8 years,
so I have to pay 2.5% of entire 8 years contribution OR of last
one year only?
ANSWER: Its important to understand how Provident
funds operate. In simplicity:
A = Employers contribution to the fund
B= Employees compulsory contribution to the fund which is usu-
ally equal to A. This is automatically deducted from the salary of the
employee.
C = Addional (voluntary) contribution by the employee to the
fund.
Total Provident fund is A+B+C.
The consensus of Ulema is that Zakat is not mandatory on
the A and B portions, as this amount only reaches the employee
after its maturity. It is deducted before the paycheck reaches the
34 Zakatonomics the Divine Economic System
employee. So Zakat is to be paid on maturity (ie. at the time of
retirement of the fund)
On the C portion, since it is paid voluntarily, with the main
idea of savings, then Zakat has to be paid on this portion every
year, on the cumulative amount.
e.g. If a persons salary is say 10,000 per month. Lets consider the
rate of compulsory PF contribution is 5%. Voluntary contribution
decided/agreed by the employee is an additonal 7.5%. Thus
A = 5% of 10,000 x 12 months = 6000 per annum
B = 5% of 10,000 x 12 months = 6000 per annum
C = 7.5% of 10,000 x 12 months = 9000 per annum.
Zakat has to be paid on 9000 every year, cumulatively. e.g.
One has to find out the total portion of his voluntary contribu-
tion and pay zakat @2.5% of the value of C. (However, if one
gives zakaat on his portion of B then this is a very good gesture
and Inshallah, Allah will reward him/her enormously)
At the end of first year you pay 1*9000*2.5% = 225
At the end of second year you pay 2*9000*2.5% = 450
At the end of third year you pay 3*9000*2.5% = 675
At the end of sixth year you pay 6*9000*2.5% = 1350
Zakat on 401K, Provident Fund & Gratuity 35
11
Zakat on House Mortgages
and Car Loans
Many of us have Cars and Homes bought through mort-
gages, both Islamic and from conventional banks. **Riba
(Interest) is not Halal in any form, but I am not deviating into
this discussion here**. For purposes of calculation of liabili-
ties related to car loans and mortgages, most scholars are
unanimous in their rulings that the impending loan is not to
be termed as liability. For those of you using the Zakat Cal-
culator spreadsheet, please do not input your outstanding
loan amounts as liabilities in the Zakat Calculator. (i.e.
please ignore the outstanding loan amounts)
E.g. If you have a house mortgage of USD 100,000 and so far
you have paid $30,000, then you should not consider the 70,000
as a liability. The same applies for Cars taken on loans for per-
sonal usage.
On the monthly installment payments made for mortgages,
you do not have to count (add or discount) these, as they are
37
automatically deducted from your wealth. e.g. if you earn
$10,000 per month, and your expenses are $6000 and Loan
repayments are $2500, you will have a nett savings of $1500 per
month. Zakat will be liable on $1500 savings if it remains with
your for one year. This continues so on and so forth for each
month of the year.

Sample Q&A on this subject
QUESTION : Please note that I have taken a loan from the
Company for the purchase of a Car and the loan amount is
much higher than the amount calculated for Zakat..Kinldy
advise whether the loan amount can be deducted from the
amount calculated for the Zakat or not.

ANSWER : Well, this is a common question in todays world.
Although a mode of transport (car, etc) and a home for personal
use are exempted from payment of Zakat, it does not necessarily
mean that the loan taken on a luxury should be deductible from
Zakat. Technically you would consider that as a loan payable,
and can argue it to be a deductible liability. But on the other
hand we dont calculate the full value of the car or home towards
our wealth.
Zakat is the right of the poor and the needy and we should
not deprive them from their rights. This is my own perspective
and I request you to think internally within yourself and, before
forming an opinion. The general consensus of Scholars is that,
our mortgages and car loans and personal loans taken to spend
on our other luxuries of life are not to be considered as Liability
deductible for Zakat. Hence in the Zakat Calculator spread-
sheet, you may not add these values in the Liabilities Section.
38 Zakatonomics the Divine Economic System
12
Zakat on Property
Investments
Investments in Real Estate and property is one of the main
areas of our wealth distribution, where significant efforts
and time and money is put in. We all long for our own
home, and in addition invest more into real estate as its
considered one of the safest forms of investment. On
landed property or lands itself, its the intention (niyyah) of
ownership that determines the zakat applicability. If the
land or property is purchased or built for the purpose of
trading and as a business, then the total value becomes
zakatable. If the land or property is bought for purpose of
rental or personal living, then zakat is only to be paid on the
rental income - after deduction of maintenance & expenses
directly associated with it. No Zakat is applicable on total
value of the land/building.
For personal living and household, there is no zakat appli-
cable, even if you own more than one house, however as
39
explained above, if there is a rental income associated, then one
should be paying Zakat on that income.

Our entire Imaan is based upon Intentions (Niyyah). This
question of being unsure is wholly related to ones niyyah and
generalization is not possible.
QUESTION - Suppose, I have a property that I have ear-
marked to generate income by means of value appreciation
when I sell it, say after 10 years. Now, this property is also gen-
erating some income additionally by means of rent. So, in this
case, do I have to calculate Zakat on the current market value of
the property + the income generated through its rent.
ANSWER: This is all based on Niyyah. If you have decided
that this property (land) is bought for the sake of selling off and
making capital gains, then you have to treat it as another asset in
your possession. If you have taken it precisely for rental purpose,
or for building a house/structure for rental or own usage, then
you have to include it in accordingly for calculations.
In your case since you have both the options open (and your
Niyyah is clear about this), you can use your second option of
paying zakat on the rental income and then pay zakat on the full
value of the land once you decide to sell it over. We need to
have a clear conscience and pray Allah for no wrongdoings.

40 Zakatonomics the Divine Economic System
13
Zakat on Loans given to
Friends
We all come across situations in our life, where one has
helped someone in dire needs, and given some money not
as charity, but as a loan to be returned back at some point in
the future. In very difficult situations, such as medical
emergencies, marriages, loss of job, etc., the person taking
the loan is generally not in a position to discuss how and
when the loaned amount would be returned. Ideally
speaking any transaction should be recorded in writing,
with two witnesses, as per the practice and preachings of
our Prophet (PBUH). However, in most cases we do not
put this on record, and generally leave it to good faith as cir-
cumstancial and cultural ethos come into play. How
should be the treatment on such loans, when we calculate
our Zakat. I have tried to explain this through a question
asked by a brother as given below.

41
QUESTION - I have given loans to my brothers, sisters,
friends or relatives. I am not sure when will they pay me back.
How should I calculate zakat on this.
ANSWER - Technically, all loans given out are considered to
be your property and wealth. There can however be two dif-
ferent scenarios:

Returns expected and assured:
If returns are assured then you have to pay zakat on it every
year, as if it was your own money / wealth. However some
Ulemas give a verdict and a concession saying that you can pay
the zakat once you receive the amount, but you will have to pay
retrospectively, i.e. for all the time that you have not paid zakat
on.

Returns Unexpected or Unsure:
If some loans are given to relatives/friends, where you have
given it without an expectation to receive it back, then in such
cases, one can start paying zakat on them from the time you
receive the amount back. Its the intention (Niyyah) that is
very important to be taken into consideration in all our acts.
May Allah guide us to the right path, always. Aameen.
42 Zakatonomics the Divine Economic System
14
Who Should pay Zakat on
Wifes Gold Ornaments
A very pertinent and common question, especially amongst
the families of Asian and Indian subcontinent is the issue of
who should pay Zakat on the gold and silver jewellery
owned by the wife. Generally the wives are homemakers
with no specific income of their own and at the time of
annual Zakat payments this can lead to some key decisions.
The husbands argument is that these ornaments were pre-
sented to the wife by her father or brother, and as a hus-
band, he exerts no rights on that jewellery. Some of us con-
veniently invoke the Islamic philosophy of segregation of
ownership of wealth. In such cases, who is liable to pay the
Zakat.
As per Islamic teachings, the owner of wealth above Nisaab,
regardless if he is a man, woman or child, is the one who is liable
to pay the Zakat on it. This is irrespective of the fact, that wife
in this case, does not have any additional income to pay the
43
Zakat from. The husband (or guardian) of the woman is not
liable to pay Zakat for her. However if the husband, or father
or brother or son of the woman, of their own will and without
compulsion, wishes to fulfill the zakah obligation for her, there is
no harm and inshallah would be rewarded many times for their
act of benevolence by Allah (SWT). For any reason, if she is not
able to get the Zakat amount on time, then in such cases she is
obliged to pay off the Zakat due, even if she has to sell 2.5% of
her jewellery.
Hadith:
Sunan of Abu-Dawood Hadith 1558 Narrated by Abdullah
ibn Amr ibn al-As

A woman came to the Messenger of Allah (saws) and she was
accompanied by her daughter who wore two heavy gold bangles in
her hands. He (saws) said to her: Do you pay Zakat on them? She
said: No. He (saws) then said: Are you pleased that Allah may
put two bangles of fire on your hands? Thereupon she took them off
and placed them before the Prophet (saws) saying: They are for
Allah and His Messenger (saws) (to distribute to the poor as they
will).

Regardless of whether the woman herself pays the zakah for
the wealth she owns, or whether her father, or husband, or son,
or guardian chooses to pay the Zakat for the wealth owned by
her, provided the annual Zakat dues are paid on her excess
wealth, the woman would have deemed to have fulfilled her
obligatory duty of Zakat.

44 Zakatonomics the Divine Economic System
15
The Calculations of Zakat
Calculation of Zakat has always been thought of a compli-
cated process by many of us. My first endeavor to popu-
larize and simplify the concept of zakat and its calculations
was to come up with a simple spreadsheet which provides
all the elements of Zakat into a single window. This spread-
sheet is available online and you will have to refer to the
website www.zakatonomics.com [http://www.zakato-
nomics.com] and download the latest version of the
spreadsheet. Inshallah, it will assist you in the calculation of
your Zakat.
The instructions are also available on the spreadsheet, but for
reference, they are also given below in this chapter. These are
simplified, to the point instructions and clarifications. You may
use the details of each section below in conjunction with the
Calculation Spreadsheet.

Zakat on Pure Gold and Gold Jewellery
45
Zakat should be calculated at 2.5% of the market value as on the
date of valuation (In our case we consider 1st of Ramadhan).
Most Ulema favour the Market Value prevailing as on the date
of Calculation and not the purchase price.

Zakat on Precious and Semi-Precious Stones
There is considerable contention on whether these are to be
considered for valuation. In my humble opinion if they have a
value, then they calculate towards your wealth, and it is on the
wealth that Zakat is mandatory. However please consult with
Ulema, before acting on this section. Most Ulema contend that
a diamond is a piece of carbon and its value varies, unlike that of
gold or silver.
One may calculate the Saleable Value of Items-at-hand on the
date of Zakat Calculation.
Zakat on Silver.
Zakat is to be paid on Silver in Pure form or Jewellery, Utensils,
Decorative items and all household items including crockery,
cutlery made of silver at 2.5% of the prevailing market rates.

Zakat on Cash and Bank Balances
Zakat should be paid at 2.5% on all cash balance and bank bal-
ances in your savings, current or FD accounts. The amount
technically should be in the bank for one year. Usually it hap-
pens that the balance keeps on changing as per personal require-
ments.
You may make your best judgement and the best way is to pay
on remaining amount on the day of calculation
Zakat on Loans Given, Funds, etc
46 Zakatonomics the Divine Economic System
Zakat is payable by you on loans you have given to your friends
and relatives. It should be treated as Cash in Hand. You may
deduct Loans Payable by you to arrive at the nett present value
of your wealth. However, if you are in doubt, on the return of
your money, then you may not calculate it as your wealth. You
can add it to your wealth, if and when your receive your
money.
Zakat is payable on all Govt Bonds, Public Sector Bond, paid-up
Insurance premiums, your paid-up portion of Provident Funds,
Govt Bills receivables, etc. Pls remember you need to be aware
of what the sharia says about Insurance and other types of
investments. It is outside the scope of this Zakath Calculator.
Zakat on Landed Property
Zakat is not payable on personal residential House even if you
have more than one and meant for residential purpose only.
Also Zakat is not applicable on the value of Property given on
rent irrespective of how many. However Zakat is payable on the
rental income itself after deducting the maintenance and other
expenses.
However if your intention of holding properties is to sell at a
future date for a profit or as an investment, then Zakat is payable
on the Market Value of the property. Also, if your intention of
holding properties changes in the current year, i.e. from self use
to business then you need to pay Zakat on that Property Value.
Zakat on Business:
This is for Business Persons only. No matter what business you
are into, youve got to pay Zakat on all STOCK-IN-TRADE.
The stock must be valued at its Landed Cost Price. If you have
any bills receivable (sales given on credit) then you need to add
the same towards calculations.
The Calculations of Zakat 47
Deduct the Amounts due to your suppliers and deduct the loans
on stock on the date of calculation. Dead Stock should be calcu-
lated on scrap value or its saleable value. Damaged stock should
also be valued at its scrap value.
Be honest in the calculations, as ZAKAT is an INSURANCE on
your STOCK directly from ALLAH and who better an insurer
than Him.
There is no Zakat on Factory Buildings or any kind of machi-
nery, but there is zakat on products produced in the factory (i.e.
finished goods value). Please refer to competent Ulema or a
scholar who can shed more light on your specific issues.
Zakat on Partnership Firms.
Zakat can be paid EITHER by the firm OR separately by the
owners. If the firm is not paying, and the partner wants to calcu-
late his share, he should take the amount standing to his capital
and loan account as per the last balance sheet. Add his estimated
share of profit till the date zakat is calculated.
This can only be estimated as it is difficult to calculate the exact
profit or loss between an accounting year.

Zakat on Agricultural Product
Zakat is payable on all Agricultural produce including fruits,
commercially grown flowers, vegetables and all types of grains at
the harvest time itself. The passing of One year does not apply
for agrultural produce. If there are two or more crops on the
same land per year, then Zakat has to be paid as many times on
the crop, irrespective of the time.
The Consensus formula for Zakat calculation on Agriculture is
as follows:
48 Zakatonomics the Divine Economic System
On crops dependent purely on rain water it will be 10% of pro-
duce, On crops not irrigated through rain water but use Canal
Water, Tank Water, Borewell and Open wells, the Zakat is 5% of
the produce. For Crops dependent partly on Rain Water and
partly on other water, the Zakat applicable would be 7.5% of
produce.

Zakat on Animals
On all grazing animals like goats, sheep, camel, cows, broiler
chickens, the consensus Zakat payable is one animal/bird for
every 40 animals owned. However you may wish to give cash in
lieu of the animal/bird itself.
Please consult your local Scholar or Maulvi or Imaam who can
guide you to the right direction, or refer to books of Fiqh if you
would like to have first hand confirmation of the situation.

Liabilities Deductions
If you have any pending tax payable to the govt, as of the date of
Zakat Calculation, then the same may be deducted before
arriving at the net worth. If you have taken any loans from any
person or institution, and if you have not already deducted the
same from any of the above sections, then you can deduct your
Payables over here. Please be truthful, as Zakat is a sure way of
protecting ones wealth if Zakat has been paid on it regularly and
fully.
LOANS taken only for Zakatable-Wealth should be deducted.
Cars, Houses, etc are not Zakatable wealth. So any loan/mort-
gate taken for these purposes are not to be deducted.
FOOTNOTE: Please note that RIBA in any form is Haram
and strictly prohibited. So please stay away from taking Loans
The Calculations of Zakat 49
on Interests AND Collection of Interests from any body or insti-
tution or other forms of RIBA.
COPYRIGHT NOTICE: You are free to distribute this Calcu-
lator, by email, by print or by posts over the Internet. My inten-
tion in creating this was to make the task of Zakat as simple and
easy as the act of Zakat itself. However if you are making any
modifications or changes please keep me informed.


50 Zakatonomics the Divine Economic System