How to pay Zakat on asset investments?

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There are different rates of Zakat that apply to different types of assets. According to Imam Malik, Zakat is due on three types of assets only: “the produce of plowed land, gold and silver, and livestock.” Contemporary Islamic jurists have extrapolated Zakat rates for nearly all types of assets.

Zakat on Investments
According to Sheikh Yusuf Qaradawi, investments are most appropriately categorized as “the produce of plowed land,” as both are “productive capital” assets that yield gains. Sheikh Qaradawi notes that Zakat is due on the gains of such “productive capital,” not the “productive capital” itself. As for the rate of Zakat applicable to investments, the following hadith offers guidance:

The Prophet (Salla Allahu Alayhi wa Sallam) said: “On a land irrigated by rainwater or by natural water channels or if the land is wet due to a nearby water channel, ushr (i.e. one-tenth, 10%) is compulsory (as Zakat ; and on the land irrigated by the well, half of ushr (i.e. one-twentieth, 5%) is compulsory (as Zakat on the yield of the land).” Zakat

“عن النبي ﷺ أنه قال: فيما سقت السماء العشر، وفيما سقي بالسواني أو النضح نصف العشر[1]. رواه البخاري”

According to the Hadith, half of ushr 5% Zakat percentage is applicable for the plowed land that is irrigated by the Well since it is possible to clearly calculate Net Gains, unlike a land watered by rain or natural water channels it would be impossible to calculate Net Gains. As a result and since it is possible to accurately calculate Net Gains in investment accounts, and according to the Hadith, the half of ushr rate of 5% is appropriate.

Zakat on Long-term Investments
Muslims are encouraged to invest for the long term. Though investors may see gains in their portfolio value, the gain may not be realized for years. Islamic jurists have agreed that in order to distribute Zakat sooner rather than later it is allowable to consider the difference in the market value of your portfolio from the beginning to the end of each Gregorian calendar year and pay 5.15% (or 5% calculated according to the lunar calendar) of the gain, if any, as Zakat. This method of estimating your Zakat is based on two assumptions:

You have/will reach Nisab within the calendar year (Currently $3,560)
You have held your investments or your resources for investment (cash, for instance) for at least one lunar year before your Zakat is calculated for the calendar year.

Zakat on Retirement and Brokerage Accounts

For the purpose of Zakat, vested balance in Retirement and Brokerage accounts are considered part of net worth, as the contributor has eventual access to the funds. Thus for retirement accounts (401(k), 403(b), 457(b), Keogh, IRA, SEP-IRA, Roth IRA…etc), the investor is subject to Zakat on the Net Gains only. Public trusts and charitable organizations are not subject to Zakat.

How to Calculate Zakat

Step 1: Net Gain Calculation

Year-End Account Value
Subtract: New Investments during the year
Add: Disbursements
Subtract Beginning of Year Value

Net Gains amount subject to zakat for the year

Step 2: Zakat Calculation

Zakat is 5% of the Net Gains Amount Based on Hijri Lunar Year, and 5.15% of the Net Gains Amount Based on a Gregorian Calendar Year

This Zakat estimation nets the cash flow in and out of the account. As the attached infographic illustrates, the beginning-of-year value is subtracted from the year-end value (adjusted for new investments and disbursements).

Reinvested dividends are excluded from the calculation since they are both disbursements and investments. Consider the following example.


Year-End Account Value as of December 31st: $40,203.29
Subtract: New Investments during the year of $30,100
Add: Disbursements of $10,070
Subtract Beginning of Year Value as of January 3: $10,551.72

Net Gains amount subject to zakat for due calendar year is $9,621.57

Zakat is 5.15% (Based on a Gregorian Calendar Year) of Net Gains or $495.51.

A second opinion I came across, that could be an alternative to the above, you would pay 2.5% Zakat on One fifth (20%) of the account value on the annual anniversary date of paying your Zakat.

The reasoning behind this opinion is that for Zakat calculation purposes retirement and investment accounts invested for the long-term are treated the same way a business owner would pay Zakat on their own business since retirement and investment accounts are usually invested in businesses or shares that represent business ownership. As a result, only certain assets in a business are zakat eligible (e.g. cash in the bank, cash equivalents, and inventories..etc) Scholars have agreed upon this average percentage of one fifth or 20% of the business value as Zakatable assets within the business if it’s impossible to calculate the exact value of Zakatable assets within a business.