While Zakat is no longer mandatory in most Muslim countries around the world, it is still considered to be a religious obligation as one of the Five Pillars of Islam. Zakat is a form of religious tax that is claimed from the wealthy and distributed to the poor or used to pay the religious clergy. To calculate Zakat, it is first important to establish Nisab.
1. The Nisab Calculation
Zakat should only be paid by the wealthy or those whose income or assets meet or exceed Nissan requirements. While defining Nissan as a standard for who is responsible for paying Zakat is essential, the definition differs greatly from states, scholars and Zakat collectors. However, once an established threshold has been reached within the period of one lunar year (shawl), Zakat is calculated according to an individual’s wealth with regards to specified categories and amounts.
2. The Lunar Year Calculation
Zakat becomes due on wealth accumulated over a period of 12 lunar months. The wealth needs to be retained or maintained for the entire year without decreasing below the Nisab requirement level for it to form part of the Zakat calculation. The start date could be from the date that an asset was acquired or from the day that Zakat was last paid on that specific item or category.
If the wealth increases during the 12-month cycle, this increase will be included in the Zakat calculation, as long as it remains above the Nisab determination. In other words, wealth is evaluated on the Zakat collection date rather than on an average value that was achieved throughout the year.
The collection date may be determined by a relevant Muslim authority or can be chosen by the religious devotee. Most followers of Islam choose the month of Ramadan in which to pay their Zakat due to the increased blessings that they receive. All future Zakat payments must be made in the same chosen month or every 12 months.
3. The Zakat Calculation
The easiest way to calculate Zakat is to use a calculator that is available online from a variety of different providers. However, when using this calculation method, it is important to ensure that the principles adhere to the prevailing Zakat regulations in your current location. For example, a Zakat calculation can differ for a person residing in America than for an individual in Dubai.
Commonly, 2.5% of an individual’s total income, monetary savings as well as asset value that meet the Nisab requirements are calculated as Zakat. However, this percentage can vary slightly between different regions. It is accepted that the payee calculates their own Zakat although the Zakat collector may take this task upon himself.
There are five types of wealth that form part of the calculation:
1. Personal monetary wealth and assets.
2. Liquid assets.
5. Mineral wealth or treasure.
Each category forms a separate Nisab and Zakat calculation and not on an accumulation of the five elements.
Of these, only agriculture is exempt from payment within one yawl. Agricultural Zakat is due when the crops are harvested and the calculated amount paid at a different time of the amount determined for other types of wealth.
In modern society, personal wealth includes all money whether this is cash in hand, funds in banks, trusts, stocks or bonds as well as savings or retirement funds. Income also forms a portion of personal wealth and is the main category for Zakat calculation. However, income, by Nisan, is only calculated once expenses have been taken into account.
In other words, Zakat will not be calculated on the total amount of income earned in one year but rather on the amount that remains when the Zakat payment day arrives. However, there is some debate regarding Zakatable income with some Muslims believing that the calculation should be determined on net income rather than gross income after deductions and expenses.
It is important to note that Zakat is not considered to be a donation to charity. Any charitable donations made throughout the yawl will not be taken into account in the Zakat calculation. These amounts are encouraged as part of following Islam but are over and above the obligation to pay Zakat by the middle pillar.