Alhamdullilah - it is time of the year, once again.
For us who are privileged enough to save enough and have spare cash to invest, it is important to take this time to reflect and do a stock check, figuratively and literally, whether we have done enough in contributing some of our wealth to those who need it more.
Recap - Why Do We Need To Zakat?
As one of the main five pillars of Islam, Zakat is a way for us to redistribute our wealth to the community.
As narrated by Abu Burda,
From his father from his grandfather that the Prophet (pbuh) said, “Every Muslim has to give in charity.” The people asked, “O Allah’s Prophet! If someone has nothing to give, what will he do?” He said, “He should work with his hands and benefit himself and also give in charity (from what he earns).” The people further asked, “If he cannot find even that?” He replied, “He should help the needy who appeal for help.” Then the people asked, “If he cannot do that?” He replied, “Then he should perform good deeds and keep away from evil deeds and this will be regarded as charitable deeds.”
(Sahih Bukhari, Chapter 24, 524)
The above hadith tells us that Zakat is compulsory as long you’re healthy and able-bodied to contribute, financially or otherwise.
4 Opinions Among Islamic Scholars To Understand
How you treat your stock investments varies much on how your intention (niya’).
For better context, here are the 4 opinions among islamic scholars that we ought to know (of which, the first 2 opinions are the more popular and frequently adopted ones):
1. Intention to buy & sell in the short-term (<1 year):
Pay Zakat on 2.5% of total market value of your investment portfolio.
2. Intention to hold long-term:
Pay Zakat (2.5%) only on your share of Zakatable assets (cash/equivalents + receivables + inventory) of the companies held + dividends earned. This requires some accounting knowledge.
This opinion takes the stance of shares as a tradable goods, with the intention to buy low and sell high to generate a profit in a short term.
This is akin to a business who buys and sells goods on a frequent basis.
However, if the intention is to be a long-term investor, it is treated similar to how a business partnership works, in which you're an an actual owner of a business and its assets.
Pay Zakat (2.5%) on the total market value of the portfolio regardless of short-term or long-term intention (treats all stocks as tradable goods).
This is considered the simplest in terms of calculation yet the most conservative of the 4 opinions, hence it will add up to a higher Zakat calculation.
For Singapore's context, our MUIS followed Opinion #2.
Having said that, it is perfectly fine to adopt the other 3 opinions if you feel more comfortable doing so.
Pay 10% on the profits/dividends each year at the time of Zakat due date.
This opinion treats your investments as it it were agricultural land, instead treating it as part of your Zakatable assets.
Hence, only the profits and dividends (i.e. the harvest) gained from your initial capital (i.e. your agricultural land) are subject to Zakat.
However, it is applied at a higher 10% rate according to the Islamic ruling on agricultural produce.
Pay only 2.5% on only profit/dividends.
This is the most lenient of all the opinions as it results in the least amount of Zakat due.
It treats the shares investments as fixed-assets as if they were physical property (i.e. real estate).
With this comparison, you are essentially paying Zakat only on the income and/or profits generated from the stocks, similar to how you treat your gains from property income.
Now That You've Understand...
Let’s go through step-by-step on how we should calculate your Zakat.
For better relevance and consistency, here on SmartMamat, we adopt the stance and the calculation framework from MUIS Singapore.
Step 1: Find out the Nisab for the month
This can be obtained from zakat.sg or Berita Harian.
For the month of May 2021, currently it stands at $6,644.
What this means is so long your total stock investments are worth more than the Nisab value, you’re most likely required to pay Zakat for it.
Step 2: Find out the number of shares purchased from a company
This is pretty straightforward.
Simply check your brokerage account(s) to get how many shares of a particularly company that you've purchased till date.
Step 3: Find out the Haul date
To keep things simple, just remember that the Haul date is 355 days from the date of purchase.
So for example, if you have bought some Tesla shares on 1st March 2021, as of May 6th 2021 (at the time of this writing), you’re not required to pay Zakat as the Haul date has not passed yet.
To be exact, it is only 67 days old.
However, if you bought it on 1st March 2020 (of the the lowest point last year due to the impact of COVID-19, good for you), your Haul date will fall on on 19 Feb 2021.
How do I get that? Simply add 355 days from the date of purchase.
You may use a date calculator like this site.
Step 4: Find out the value per share unit at Haul date
Now that you know the Haul date, find out the Tesla share price on that Haul date.
Using the same example, we can look up for Tesla share price on 19 Feb 2021 with a quick Google search:
As shown above, Tesla share price on 19 Feb 2021 was USD 781.30.
Step 5: Calculate your Total Value of your shares
Assuming you’ve figured that you have 100 Tesla shares in Step (2), now it is time to multiply with the share price at Haul (date).
USD 781.30 per share x 100 shares = USD 78,130 (or SGD 101,569)
(Taking conversion of USD 1 = SGD 1.30)
We can easily see that the amount is above the Nisab value (SGD 78,130 > SGD 6,644), hence you’re required to pay the Zakat of that total value.
Step 6: Multiply your Total Value of shares with 2.5%
It is a pretty simple calculation here:
$101,569 x 2.5% = SGD 2,539.23
So the zakat amount to be paid is SGD 2,539.23.
For ease of mind of possible underpaying your Zakat obligation, it is never a loss to round it up 🙂
Calculating zakat on shares is not as hard as many people think.
With the right intentions, Allah swt. will always have a way to ease the things we aim to do insya’Allah.
Now It’s Your Turn.
I’ve laid out the step-by-step on how to calculate your Zakat on Shares.
Now I want to turn it over to you. Have you done your Zakat in this blessed month of Ramadan?
Let me know in the comment section below if you still have doubts or questions on how to calculate it.
What if, instead of buying 100 shares at one go, I bought 1 share per month (using DCA) and this goes on indefinitely. How will I calculate the zakat value payable?