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Zakat (also known as Zakat al-Mal) is the 3rd pillar of the Five Pillars of Islam and is one of the most important and commendable acts that any adult Muslim could hope to perform. The word Zakat itself has the meaning of purification and increase. Allah (SWT) has made it obligatory on every sane, adult Muslim who has complete ownership of the nisab (the minimum amount treshhold that a Muslim must have before being obliged to zakat) to help those less fortunate.
Nisab is the minimum amount that a Muslim must have before being obliged to zakat. Several hadith have formulas for calculating niṣāb, the most prominent of which declares that No Zakāt is due on wealth until one year passes. Zakat is determined based on the amount of wealth acquired; the greater one's assets, the greater the tax. Unlike income tax in secular states niṣāb is not subject to special exemptions.
Calculating Zakat isn't as difficult as you think. At JustinTOOLs, we find that breaking your assets down into different categories makes the Zakat calculation process a whole lot easier.
The amount of zakat to be paid by an individual depends on the amount of money and the type of assets the individual possesses. The Quran does not provide specific guidelines on which types of wealth are taxable under the zakat, nor does it specify percentages to be given. But the customary practice is that the amount of zakat paid on capital assets (e.g. money) is 2.5% ( or 1/40). Zakat is additionally payable on agricultural goods, precious metals, minerals, and livestock at a rate varying between 2.5% and 20%, depending on the type of goods.
Zakat can be paid at any time, with the only condition being that the earnings reflect one year's worth of net savings (one lunar year).
If you cannot remember the date you became owner of the Nisab, or when the last time you paid for Zakat, then the date should be estimated. If this is not possible, then a specific Islamic date should be selected arbitrarily and adhered to annually. This is referred to as your "Zakat due date" or "Zakat anniversary".
Tips: You may use an easy to remember day as your "Zakat Anniversary Date", such as; your birthday, big days like New Year, Ramadan or your wedding anniversary.
The basic principle is that debts are deducted from wealth, and if the remainder is still above the nisab threshold, zakat is payable, otherwise not.
However, if a person has a large debt that is being paid off in instalments, such as a mortgage or large credit card debt, then one should only deduct the payment that is currently due from one's assets.
If you have a business, all stock in trade is liable for zakat, including land and real estate that has been bought for the purpose of resale. Raw materials and goods produced for sale are also subject to zakat. The buildings, machinery, vehicles and so on that are essential for the business are exempt from zakat.
Example:
Selena owns a cupcake factory. When calculating the zakat that the business owes, she takes into account the monetary value of all the cupcake ingredients she has in stock and all the unsold cupcakes stored in storage. The factory building, machinery and equipment are not taken into account when calculating zakat.
Zakat is required to be paid if a person is: 1). Adults who have reached the age of puberty). 2) Muslim: Zakat is not paid by non-Muslims. 3). Sane. 4). In complete ownership of the Nisab.
According to the Holy Qur’an (9:60), there are eight categories of people who qualify to be beneficiaries of zakat. The list below: