• In The Name Of Allah, The Most Beneficent, The Most Merciful

Q7. What is the ruling on business wealth (Net profit, investments)?

1. Conditions for Zakat on investments in business/trade goods:

Trade is defined broadly as exchange with the intention of making a profit. Therefore, whenever the two conditions (1. Goods acquired with the intention of selling, and 2. Goods acquired with the intention of making a profit) are present, Zakat is due. This will apply to all goods if they are acquired for trade and with the intention of making a profit (including live stock, precious stones, real estate, minerals and other materials from earth). If they are not acquired for trade, but they fall under the categories of live stock, agricultural produce, and Rikaz (treasure unearthed), Zakat may become due on them following their individual Nisab and Zakat calculations. However, generally speaking, assets acquired for personal use are not subject to Zakat. The above two conditions for trade goods are in addition to the general conditions that apply to Zakat for non-business personal wealth. See details under Q12 for general conditions for Zakat.

Definition of investments in trade goods:

When one is engaged in business, whatever its nature, one usually invests some money in the purchase of building, furniture, and equipment which take the form of fixed investments that are used and are not “goods for trade”. There is no Zakat on such investments that are intended for use and not for sale. Next, there is the investment in inventory (raw material, or work-in-progress, or finished goods in the case of any business that involves manufacturing or processing) and in some operating cash. These assets are subject to Zakat. During the Zakat year (one lunar year called the Hawl), these ‘trade goods” are sold and result in cash or “receivables” (which eventually gets converted to cash after payments are received from customers). Receivables that are expected to be converted to cash during the Zakat year are also to be included as zakatable assets in calculating Zakat. This also applies to any debts that are expected to be received during the Zakat year. For the general considerations regarding amount loaned to others see answer to Q13. However, any short term payables (for example, amount owed to creditors and suppliers) that are to be paid during the Zakat year, shall be subtracted from the assets before calculating Zakat. The profit generated on the sale is either put back (reinvested) into business and/or is distributed to the owners. The part that is distributed to the owners becomes a part of their individual personal wealth subject to its conditions of zakatability (see answer to Q12).

But the part that is reinvested into business in the form of operating cash, and inventory becomes a part of those assets, and are automatically included in the Zakat calculation. Therefore, Zakat on trade goods is calculated as follows:

  1. Add the value of inventory (raw material, work-in-process, finished goods), receivables, and cash.
  2. Subtract from the above any short term payables (liabilities)
  3. If the net exceeds Nisab, calculate Zakat at the rate of 2.5%.

This business has to be operating for at least one year. If any share of the business is sold during the year, that share will not be included in the assets of the seller or the buyer because neither of them had it for at least one year.

Valuation of assets:

General opinion is that the valuation shall be based on the current market prices at the time of paying Zakat since the prices do fluctuate during the year. In addition, the valuation shall be done using wholesale prices and not the retail prices, because if any liquidation of assets is done it will be at the wholesale prices.

Zakat Year for business:

The Zakat year for business is also one lunar year (called Hawl). The zakatable assets as defined above shall be at or above Nisab at the end of the Zakat year.

There is another opinion that the value of zakatable assets shall satisfy Nisab throughout the Zakat year. If the value gets below the value of Nisab, a new Zakat year needs to be started after the value meets the Nisab. However, the practice at the time of the Prophet was to calculate Zakat if at the end of the Zakat year the value of zakatable assets was equal to or higher than Nisab.

Multiple owners:

If there are more than one owner, the net value of assets of the business that are subject to Zakat as explained above, should be apportioned to each owner based on his/her individual share. Then each individual owner is responsible for calculating and paying Zakat on his/her share. This approach is preferred because it may exempt a partner with a small share from paying Zakat. The business may pay Zakat on behalf of all owners if they all are obliged to pay Zakat.

No duplicate payment of Zakat on the same assets:

As a general principle, an item is subject to Zakat (upon satisfying the conditions of zakatability) only once. For example, if a business is paying Zakat on behalf of all owners (assuming that everyone meets the Nisab), then no zakat is required on the proceeds of the business to the owners as a part of their personal wealth.

2. Income generating assets: (Rental income from assets that are rented):

If one is engaged in the business of renting assets for income, there are differences of opinion regarding whether the value of the assets themselves is zakatable or not since they provide growth by producing income or profit. Stronger view is that the value of these assets is not subject to Zakat, but any income derived from the exploitation of these assets is subject to Zakat provided the income received in the Zakat year meets Nisab. There are differences regarding the rate at which Zakat is to be calculated. A modern view is that the rate of Zakat shall be either 10% or 5% on the net income in a Zakat year. This opinion is based on an analogy to the Zakat paid on the agricultural produce. However, the conservative opinion will be to use 2.5% as the general rate of Zakat on the net income from rental property during the Zakat year. We have selected this view for the Zakat calculator.

This will also apply to rental income from any exploited assets, such as, cars, jewelry, animals, etc. If the rental income for a given Zakat year is the only source of sustenance for the owner, a reasonable cost for his/her living expenses including the living expenses of his/her dependents for the year, must be deducted. Then on the remainder amount Zakat shall be calculated, if that amount meets the value of Nisab.