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2011-15. All rights reserved. Ethica Institute of Islamic Finance is a training, certification, and advisory company.

Ethica is #1 in Islamic finance training and certification with over 20,000 paid learners in more than 40 countries and over 100 banks, universities, and institutions in 2011
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www.EthicaInstitute.com
PO Box 127150, Dubai, UAE | contact@EthicaInstitute.com
2011-15. All rights reserved. Ethica Institute of Islamic Finance is a training, certification, and advisory company.

Establish

regular prayer and give Zakah


(Quran 73:20 )

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The Importance Of Zakah


The Prophet Muhammad (Peace be upon him) said: If someone is given wealth by Allah but does not pay its Zakah, that wealth will appear to him on the Day of Judgment in the form of a bald serpent with 2 horns, encircling him and squeezing him all day, then holding him by the lips and telling him, I am your wealth, the treasure which you hoarded.
(Bukhari & Muslim)

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The Importance Of Zakah


Zakah has an inner and an outer dimension Outwardly it purifies your wealth Inwardly it restrains inclinations such as greed, miserliness

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What Is Zakah?
Zakah is a Divine obligation It is the right of the poor over the rich Withholding Zakah is equivalent to depriving the poor of their God-given right

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In their wealth there is a known share for the beggars and the destitute (Quran 70:24-25) Take alms from their property that you may purify and sanctify them and pray for them. Verily your prayers are a comfort for them (Quran 9:103)

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What Is Nisab?
Minimum amount of wealth upon which Zakah is payable The financial floor above which an individual is considered Sahib-in-Nisab and liable to pay Zakah The Nisab limit was set by the Prophet (Peace be upon him) at 20 Mithqal which is equivalent to: 87.48 grams of gold 612.36 grams of silver

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What Is Nisab?
To determine current equivalent of the Nisab limit, one must establish market rate for a gram of gold and silver Zakah payable if: Zakatable assets + (Debts owed to one) (Debts owed to one)

=> Nisab

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What Is Nisab?
Zakah is payable at a rate of 2.5% on all assets Lets say the Nisab is $600 Example 1 Hamids Zakatable assets are valued at $10,000 He owes $7,500 to a friend His Zakatable assets are $10,000 - $7,500 = $2,500 Hamids Zakah liability is 2.5% of 2,500 = $62.5

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What Is Nisab?
Example 2 Jamals Zakatable assets are valued at $3,000 Jamal owes $2,500 to various people His Zakatable assets are $3,000 - $2,500 = $500 Jamals Zakatable assets are below the Nisab level, he is not liable to pay Zakah

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Who Pays Zakah?


Sane adult Muslim Possessor of wealth Sahib-in-Nisab

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Who Is Not Eligible To Receive Zakah?


A descendant of the Prophets family (Peace be upon him) The payers: Spouse Father or grandfather Son or grandson

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Who is Entitled To Receive Zakah?


The poor and destitute People whose total assets, excluding assets for basic necessities, after deducting outstanding basic living expenses and debts are less than the Nisab level Relatives should be preferred over the general public

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Assets Subject To Zakah


Personal Assets All assets for personal use are exempt from Zakah except cash, gold and silver Trading Assets Zakah is liable on all assets purchased for resale Zakah is not liable on assets purchased to earn rent, investment return

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Assets Subject To Zakah


Zakah is paid on the balance of assets owned on the Zakatable date Zakah is not payable on impermissible income Entire value of impermissible income must be given away to charity

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Six Categories Of Assets Subject To Zakah


1. Gold and silver 2. Cash and liquid investments 3. Business assets 4. Livestock 5. Agricultural output 6. Mineral Ore

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1. Gold And Silver


Subject to Zakah in all forms, whether owned for personal use or trade

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2. Cash And Liquid Investments


Cash at bank Cash in-hand Any form of investment that can be easily liquidated excluding equity based investments

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3. Business Assets
I. Property and other fixed assets Zakah treatment is based on the following purchase intentions: i. Intention to retain ownership of asset ii. Intention to reside in property iii. Intention to resell asset iv. No intention

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Intention To Retain Ownership Of Asset


Not subject to Zakah (e.g. investment property) Any profit received from rent is subject to Zakah

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Intention To Reside In Property


If property is used entirely as residence it is exempt from Zakah

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Intention To Resell Asset


If purchased with the intention to resell for profit it represents stock in trade Entire value of property is subject to Zakah

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No Intention
If there is no clear intention for purchasing an asset Zakah is not payable on it Any profit received as rent is subject to Zakah

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3. Business Assets
II. Raw material, Work-in-progress, Finished goods Subject to Zakah as they are purchased with the intention to resell

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3. Business Assets
III. Shares / Equity Investments / Trusts If purchased with intention to resell, they are subject to Zakah If purchased as investment to generate returns, Zakah is due only on Zakatable assets

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When Is Zakah Paid?


Zakah is payable on assets held for one lunar year Zakah year starts when a person first becomes Sahib-in-Nisab

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Zakah Date Considerations


1. Date when individual first becomes Sahib-in-Nisab 2. Wealth fluctuation during the year 3. Date of distribution

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Date When Individual First Becomes Sahib-in-Nisab


Zakah year begins on the date an individuals wealth first equals Nisab Zakah liability is calculated from same date every year If an individual does not recollect this date, he can make an estimate The beginning of Zakah year may be set in Ramadan

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Wealth Fluctuation During The Year


In case wealth fluctuates during the year, Zakah is due only if it equals or exceeds Nisab at the end of the year

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Date Of Distribution
Zakah should be distributed exactly one year after an individual becomes Sahib-in-Nisab

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How To Pay Zakah?


You must: Identify the date you became Sahib-in-Nisab Determine market value of Zakatable assets on Zakatable date Add debts owed to you, subtract debts owed to others from value of Zakatable assets Pay Zakah at 2.5% of Zakatable assets value

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Validity Of Zakah
Zakah is valid if: Zakah payer makes a clear intention upon payment Recipient meets Zakah eligibility criteria Recipient receives ownership of assets given to him as Zakah

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Missed Zakah
Zakah payments missed in previous years due to ignorance or negligence must be calculated and paid

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Zakah And Debts


These include: 1. Debts owed to oneself 2. Debts owed to others

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Debts Owed To Oneself


Debts owed to oneself are subject to Zakah The following debts are included in Zakah calculation before they are received: Debts owed to one on account of goods sold Personal loans All pension schemes except for state pension schemes

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Debts Owed To Oneself


The following debts are included in Zakah calculation after they are received: Inheritance Salaries Pensions Dowry owed to wife

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Now Lets Look At Pensions


Where pension benefits have not been received: If payment made to pension policy is compulsory, deducted from salary at source and isnt invested, it is not subject to Zakah Zakah is due on all forms of pensions that are invested When not invested, pension holders should determine value of their contribution as it is subject to Zakah

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Debts Owed To Others


Generally, all debts payable are deductible from Zakatable assets Debts payable include: Basic living expenses payable Debt owed against goods purchased on credit Installment-based debt Personal, commercial loans Taxes Dowry owed to wife
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Debts Owed To Others Installment-Based


Classified into 2 categories: Muajjal: Debt for which immediate payment is due Deducted from Zakatable assets Muajjal: Debt paid in installments Future payments for next 12 months deducted from Zakatable assets

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Debts Owed To Others Taxes


Money paid as general tax cannot be offset against Zakah Money payable as tax can be deducted from Zakatable assets

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