By M S Shabbir

Ramadhan is a holy month for 170 million Muslims who spend their wealth in charitable causes and consider this deed as not an expense item although it certainly reduces one’s available cash flow. This spending on the poor and needy is an investment in the Pious Deeds Deposit Account. Zakat is the right of the poor to the wealth of the rich, a right bestowed by the true Owner and Giver of wealth.

Zakat is obligatory on all adults who possess wealth above the minimum threshold with complete ownership and free to use and has completed a full lunar year No zakat is due on wealth before one year from the date of acquisition.  Since it may not be practical to record the dates for determining the holding period it is advisable to fix a date for computation irrespective of date of purchase or sale. If a large amount of money is received just before the zakat was due for the year it should be included for calculation purpose. Care should be taken to calculate zakat for the additional 10 days being difference between Gregorian and lunar calendars.

Zakat is not payable on investments made in minor’s name, only if encashment will be made on their attaining maturity. Things like the home you live in, vehicles in use and other properties purchased for personal use need not be included for zakat calculation.

EPF being a compensation for service can be deducted in calculation. However, VPF and ELSS whose nature is that of voluntary savings for tax planning purpose need to be included for zakat calculation.

Any long-term debt such as mortgages, soft loans for industries taken for economic development of the country the non-interest or principal portion only of the forthcoming lunar years’ worth of payments can be deducted for zakat calculation purpose. However, zakat is payable on the EMI of long-term debt.

Goodwill amount is considered as consideration for handing over possession and therefore zakat is payable on such amount. Zakat is not payable by both lessor and lessee on long duration lease deposits. As against this, lease deposits for short durations is to be included for zakat payment.

According to shariah, zakat is payable only on gold and silver. Precious stones like diamond are exempted. Most of the scholars have changed their view and now opine that these items are being bought as securities and therefore diamonds and precious stones imbedded as part of jewelry may be excluded but their valuation be included if purchased for security reasons.

Zakat is payable on all purchase of real estate be it plot or building, shares or any other stock-in-trade with an intention to trade. If shares are purchased for transfer to next generation and not traded, then zakat is payable only on dividend amount. For zakat, investment in retirement plans are to be considered as part of net worth.

Zakat is 2.5% of total wealth and must be paid with the intention of paying zakat. If one gives any other charity, it cannot be counted as zakat if it did not carry the necessary intention. It is believed that each person shall be held responsible for his / her intentions, actions and behavior throughout their lifetime and each of these is being recorded in a Book of Records.

One should not equate zakat with taxes paid to the government nor deduct taxes before calculating zakat unless these taxes are overdue and are required to be paid immediately to the government. Taxes that we pay to government are in no way a substitute to zakat because zakat must be distributed to specific groups of people who are Monotheists.

One question which most people ask is whether cost price, sale price or market price is to be taken for calculation of zakat. It is preferable to take the market value although the sale price may be lower more often.

(The writer is an Investment Advisor and Managing Director of SenSage Financial Services Pvt Ltd)