Zakat and its rules
For the vast majority of Muslims today, zakat is treated as a simple 2.5% calculation on certain types of wealth, once a year, above a minimum threshold defined in grams of gold or silver. Yet when we return to the Qur'an itself, a very different understanding appears on the types of wealth subject to zakat and the rate itself. The Qur'an presents zakat as a tool designed to prevent wealth becoming the private property of the elite and it legislates a perfect system to achieve this.
When Muslims as a whole obtained new wealth without having "...to battle for on horses or on foot..." (59:6), the Qur'an restricted this specific wealth gain to only "...Allah and His messenger, and the relatives, and the orphans, and the poor, and the wayfarer..." (59:7), so that wealth "...will not remain monopolised by the rich among you..." (59:7). This wealth belonged to the state as a collective. Individuals outside of these groups of people were told that Prophet Mohammed (peace be upon him) had sole discretion in dividing this wealth when the Qur'an states "...you may take what the messenger gives you, but do not take what he prohibits you from taking..." (59:7). This is a declaration of an economic aim from the Qur'an where wealth must not pile up in the hands of just a few wealthy people.
The Qur'an describes itself as "...a Book whose verses have been made fixed, then detailed..." (11:1). If Allah intended zakat to have a separate rate, the Qur'an would have stated it just like it does with the shares of inheritance. Here, the Qur'an would not legislate 20% specifically for war gains, and then remain silent on the more fundamental issue of zakat. The 20% rate must therefore apply to all gains including zakat.
Modern economics today reach similar figures. Capital gains tax, which like zakat applies to realised wealth growth, averages around 15-20% globally. The Qur'an's mandated 20% already recognised this fourteen centuries ago.
The concept of a minimum threshold, commonly known as 'nisab' is established by default, otherwise the Qur'anic principles would mean zakat receivers paying zakat to themselves. The nisab should be tied to the local economic situation and not based on global commodity prices like gold and silver. The Qur'an commands to "...take to surplus, and order what is customary..." (7:199), which points to a local nisab based on the local customs rather than a global formula.
The Qur'an specifies precisely that the zakat is "...for the poor, and the needy, and those who work to collect them, and those whose hearts have been united, and to free the slaves, and those in debt, and in the cause of Allah, and the wayfarer..." (9:60). Outside of these eight categories, no one else is entitled to receive zakat if they have wealth above the nisab level.
Prevention of wealth concentration
When Muslims as a whole obtained new wealth without having "...to battle for on horses or on foot..." (59:6), the Qur'an restricted this specific wealth gain to only "...Allah and His messenger, and the relatives, and the orphans, and the poor, and the wayfarer..." (59:7), so that wealth "...will not remain monopolised by the rich among you..." (59:7). This wealth belonged to the state as a collective. Individuals outside of these groups of people were told that Prophet Mohammed (peace be upon him) had sole discretion in dividing this wealth when the Qur'an states "...you may take what the messenger gives you, but do not take what he prohibits you from taking..." (59:7). This is a declaration of an economic aim from the Qur'an where wealth must not pile up in the hands of just a few wealthy people.
Individuals are not the owners of their wealth but rather they are instructed to "...spend from what He has
made you successors to..." (57:7). This means that wealth is a trust that passes through human hands across generations. People in the present inherit it from those before them and pass it onto those after them. Even if people fail to recognise this fact today, they will in the hereafter when a person doomed to hell will cry "my money cannot help me" (69:28), realising too late that their wealth never belonged to them.
This is why Allah ordained establishing zakat in numerous verses of the Qur'an. It is the divine system from Allah which prevents the wealth from becoming trapped in the hands of the rich. To stress the importance of zakat, the Qur'an says it is "...a duty from Allah..." (9:60), to ensure nobody is left in any doubt of its status.
20% rate of zakat
Prophet Mohammed (peace be upon him) was asked "...how much they are to give..." (2:219), to which Allah instructs him to respond by saying "...the excess..." (2:219). This may appear a vague answer at first, but the Qur'an says this answer is clear because "...Allah clarifies for you the revelations
that you may think" (2:219). This indicates that the clarification exists within the Qur'an itself. The term "...the excess..." (2:219) therefore requires a Qur'anic definition elsewhere, rather than being left to guesswork.
The Qur'an says "...know that anything you profit, one-fifth shall go to Allah and the messenger, and the relatives, and the orphans, and the poor, and the wayfarer..." (8:41). This verse does not restrict the fraction to a different economic category but rather, it defines how gains are divided. In the absence of any alternative fraction anywhere in the Qur'an, this one-fifth functions as the Qur'anic clarification of what constitutes "...the excess..." (2:219) to be given from profit.
The Qur'an already establishes 100% distribution for gains obtained without effort, as when wealth came to Muslims without having "...to battle for on horses or on foot..." (59:6) and went entirely to "...Allah and His messenger, and the relatives, and the orphans, and the poor, and the wayfarer..." (59:7). Individually earned gains have a 20% distribution rate. This creates the principle that wealth earned through effort entitles a person to keep 80% while 20% must circulate to prevent wealth concentration.
The Qur'an describes itself as "...a Book whose verses have been made fixed, then detailed..." (11:1). If Allah intended zakat to have a separate rate, the Qur'an would have stated it just like it does with the shares of inheritance. Here, the Qur'an would not legislate 20% specifically for war gains, and then remain silent on the more fundamental issue of zakat. The 20% rate must therefore apply to all gains including zakat.
A natural question arises as to why apply the 20% rate to zakat rather than the 100% rate, given that both direct wealth to the same categories of recipients. The answer lies in how the wealth was obtained. The 100% rate applies to collective gains that came without having "...to battle for on horses or on foot..." (59:6), wealth no individual earned through personal effort. The 20% rate applies to gains obtained through active engagement. Zakat falls into the second category. The 20% rate preserves the incentive to produce while ensuring surplus flows to those in need.
Modern economics today reach similar figures. Capital gains tax, which like zakat applies to realised wealth growth, averages around 15-20% globally. The Qur'an's mandated 20% already recognised this fourteen centuries ago.
The familiar 2.5% rate comes from administrative practice and not the Qur'an. It represents human taxation for state functions like roads, infrastructure and public services which are separate from the divine obligation of zakat. For a detailed explanation of where the 2.5% comes from please see here.
Assets included for zakat
When the Qur'an states "...that anything you profit..." (8:41) is subject to tax, it is referring to newly acquired net wealth and, not total existing wealth accumulated over a lifetime. This distinction is fundamental as zakat is a one-off tax payable on new wealth gains, and not repeated annually on already taxed wealth.
The purpose of zakat is so that wealth "...will not remain monopolised by the rich among you..." (59:7). To achieve this outcome, then all forms of wealth must be included for zakat. The phrase "...that anything you profit..." (8:41) is unrestricted so there can be no exemptions for asset classes. Any exemptions will go against the Qur'an and will lead to loopholes. The wealthy would simply shift their wealth into exempt categories such as real estate and actively aim to go against Allah's declared purpose. This is inherent in the traditional understanding of zakat.
This means all wealth from "...anything you profit..." (8:41) is subject to zakat including but not limited to, all properties, pension funds, stocks and bonds, cryptocurrency, business assets, vehicles, jewellery, land, intellectual property, and any other store of value. Any net gains on such wealth will always be subject to 20% zakat.
Assets excluded from zakat
It must be noted that zakat applies only to wealth obtained lawfully according to Islam. This automatically excludes wealth obtained through haram means such as drug dealing, alcohol sales, bribery, benefit fraud, corruption etc. Such giving will not be accepted by Allah as zakat as the Qur'an tells the believers to only "...spend from the good things that you have
earned, and from what We have brought forth from the earth. And
do not select the rotten from it to give, while you would not take it
yourselves unless you closed your eyes regarding it..." (2:267). This is because Prophet Mohammed (peace be upon him) is instructed to say "...the rotten and the good are not equal, even if the abundance of the rotten impresses you..." (5:100). When calculating zakat, ill-gotten wealth must be discarded entirely.
Zakat is a mechanism to purify wealth and therefore, it cannot purify wealth that is already inherently impure. Someone giving zakat on drug money will be like the analogy of "...the good land, its plants are brought forth with the permission
of its Lord. And for the one that is rotten, it does not bring forth
except very little..." (7:58)
Anyone in possession of such wealth may give it away to remove this burden from the soul, but must know that there will be no reward from Allah.
Minimum thresholds (nisab)
The concept of a minimum threshold, commonly known as 'nisab' is established by default, otherwise the Qur'anic principles would mean zakat receivers paying zakat to themselves. The nisab should be tied to the local economic situation and not based on global commodity prices like gold and silver. The Qur'an commands to "...take to surplus, and order what is customary..." (7:199), which points to a local nisab based on the local customs rather than a global formula.
What does this actually mean in practice? Nisab must reflect the actual cost of living in a given society. It must reflect real relative poverty rather than commodity prices. For example, it could be tied to median income rather than to the fluctuating global prices of gold and silver. In the United Kingdom, for example, poverty is officially defined as below 60% of median income which is currently around £20,000 annual household income. In a less developed country like Bangladesh, £20,000 annual household income would mean luxury, so their nisab should be much lower. This ensures the nisab is calculated fairly according to the local deemed poverty level.
Local nisab calculations avoid absurdities currently seen today. Under gold-based calculations, a person in London with gold worth £20,000, may be struggling to live day to day, given the enormous cost of living, whereas a person in Bangladesh with similar amounts of gold will likely be well off. However, under the traditional understanding, both still pay the same zakat amount on the gold.
A local nisab thus eliminates these distortions and returns nisab to its original purpose, which is to distinguish between those who have excess and those who do not. It targets those in actual need.
Nisab is deducted from total net worth each year when calculating zakat. This ensures that a person's wealth needed for living according to local standards is never subject to zakat. Only surplus wealth above this baseline is taxable.
Recipients of zakat
The Qur'an specifies precisely that the zakat is "...for the poor, and the needy, and those who work to collect them, and those whose hearts have been united, and to free the slaves, and those in debt, and in the cause of Allah, and the wayfarer..." (9:60). Outside of these eight categories, no one else is entitled to receive zakat if they have wealth above the nisab level.
- poor - these are the beggars and destitute
- needy - these lack resources to meet day to day needs
- those who work to collect - this is to pay the zakat collectors' salaries if applicable
- those whose hearts have been united - usually means those who have or are close to accepting Islam and will therefore become estranged from their own tribes and families
- free the slaves - a praiseworthy act in fulfilling Islam's goal of slave abolition
- those in debt - referring to those who resort to debt to survive
- cause of Allah - anyone who suffers for Islam such as when attending jihad or migrating to avoid persecution
- wayfarer - a traveller who is cut off from their resources
Although zakat is restricted to just these categories, it is not restricted to which of the category receives it. It could be given wholly to one category or split between categories. Furthermore, some of these categories no longer exist.
Zakat cannot be redirected to other purposes, no matter how worthy the cause may be. Governments cannot use zakat funds to build roads, maintain armies, construct mosques, or pay general salaries. Zakat is not a general tax but it is a targeted tax with divinely specified recipients. This ensures the Qur'anic aim that wealth "...will not remain monopolised by the rich among you..." (59:7) can be fulfilled.
It must be noted that zakat can be received by both Muslims and non-Muslims as the aim is to uplift society as a whole. The Qur'an does not make a distinction with regards to a person's faith.
When is zakat due
The zakat is due annually upon realisation of wealth which is based on the Qur'an's command to "...give its due on the day
of its harvest..." (6:141). In countries, where the harvests take place once year, then zakat is due annually. In countries where there are multiple harvests, then the zakat is due at the end of each harvest period.
In modern societies, where tax years are used for things like calculating wealth, annual pay, dividends summary etc, it will be logical that the zakat is payable each tax year for ease of calculation. Others may use the lunar year to follow the Islamic calendar. The important thing is to pay the correct zakat to uplift society as the final payment after death will capture any missed zakat.
For those who genuinely struggle to find the cash and cannot immediately pay the full zakat due, then know that "...Allah does not burden a soul except with what it can bear. For it
is what it earns, and against it is what it earns..." (2:286), "...A soul is not burdened except with what it can bear..." (2:233) and "...We do not burden a soul except
with what it can bear..." (6:152, 7:42 and 23:62), and the Qur'an warns the believers against self-inflicted hardship when giving charity by being "...fully open so you become in despair and regret" (17:29).
When zakat is due, the person should pay whatever is possible from available resources. The unpaid portion of zakat is not forgiven, but it is deferred like deferred tax on a company Balance Sheet. The deferred zakat remains on the estate until death, when it then must be settled.
Upon death, any deferred zakat is treated as a debt of the deceased. The Qur'an is explicit that inheritance distribution occurs only "...after a will is carried through or a debt..." (4:11 and 4:12). This means deferred zakat must be settled before any inheritance is distributed. This ensures both the obligation of zakat is fulfilled and that no one is forced into hardship when trying to meet it.
If wealth shrinks year on year due to losses or spending, no zakat is due on the loss but any future growth will account for the losses when calculating gains. Zakat tracks the actual movement and growth of wealth throughout a person's life with annual payments due, and then a final balancing payment after death.
Sins of avoiding zakat
Some might imagine they can avoid zakat by spending wealth wastefully before it can be calculated. If zakat is owed on accumulated wealth or growth, why not simply spend everything on luxury consumption, leaving nothing for zakat.
The Qur'an closes this loophole when it commands to "...give the relative his due, and the poor person, and the wayfarer; and do not squander wastefully" (17:26). Those who waste their money instead of giving zakat are like "... brothers to the devils..." (17:27), who "...was to his Lord a rejecter" (17:27).
A person cannot avoid zakat through excess spending. They may avoid the mathematical obligation by destroying their wealth through wasteful consumption; buying luxury cars, excessive clothing, or any other form of extravagant consumption, but they cannot avoid the sin. The middle path naturally produces excess. To deliberately destroy that excess through waste, in order to avoid circulation is to reject the entire economic society the Qur'an seeks to build.
On the day of judgement, it will be said to them "...you have wasted the good things given to you during your worldly life, and you took pleasure in it. Consequently, today you will be recompensed with a shameful retribution for your arrogance in the land without any right..." (46:20).
Example: zakat calculation
To demonstrate, let's calculate a simple scenario for a person over a five year period where the local nisab level is £5,000. Nisab is always exempt from zakat as this is the level required to stay above the local poverty line, so this amount is always removed from the net wealth. Net worth is calculated by adding up the market value of all assets and then deducting all outstanding debt balances.
After the first year, the net worth has increased from £0 to £10,000, a gain of £10,000. The nisab of £5,000 is exempt from zakat as this is the amount required to stay above the local poverty line. Zakat at 20% is payable on the remaining £5,000, which equals £1,000. They make a payment of £500. This leaves a deferred zakat debt of £500.
In the second year, the net worth has increased to £15,000. This means an increase in net worth of £5,000 since the previous year's £10,000. Zakat at 20% is payable of £1,000. They did not make any payments. As they still owe £500 from the previous year, this leaves a deferred zakat debt of £1,500 in the zakat account.
In the third year, the net worth has dropped to £12,000. This means they have lost £3,000 in net worth since the previous year's £15,000. This loss can be carried forward to be offset against any future gain. There is no zakat due as no new wealth has been gained. However, they have paid £1,200. This leaves a deferred zakat debt of £300 in the zakat account.
In the fourth year, the net worth has increased to £19,000. This means an increase in net worth of £7,000 since the previous year's £12,000. However, they can offset the loss of £3,000 from year three. This means a net increase in net worth of £4,000. Zakat at 20% is payable of £800. They make a payment of £1,000. As they still owe £300 from the prior years, this leaves a deferred zakat debt of £100 in the zakat account.
In the fifth year, the net worth has increased to £40,000. This means an increase in net worth of £21,000 since the previous year's £19,000. Zakat at 20% is payable of £4,200. They make a payment of £2,500. As they still owe £100 from the prior years, this leaves a deferred zakat debt of £1,800 in the zakat account.
In just five years, the person's net worth has increased to £40,000 whilst they have released £7,000 of their wealth into public circulation to uplift those who are currently eligible for receiving zakat. This process should continue until death when the final balancing payment will then capture and purify any missed growth.
Conclusion
The Qur'an legislates a clear rate, clear recipients and a clear purpose for zakat. This is 20% on new wealth accumulated over a local nisab value, allocated to specific categories and designed to prevent wealth concentration. The local nisab defines both payers and recipients to ensure fairness. The lifetime model tracks wealth growth until death which results in a final payment to ensure no wealth escapes circulation. The system of the Qur'an ensures wealth is used to uplift and eradicate poverty.