Zakat Guide for Retirees

A guide to calculating your Zakat upon retirement

Managing your finances in retirement involves many considerations, but ensuring your religious obligations are met remains a priority. This guide simplifies Zakat for retirees, covering superannuation, shares, property, and jewellery to help you fulfil this pillar of Islam with confidence. 

The Basics: Individual Responsibility 

Remember that Zakat is an individual measurement. It must be calculated separately for each member of the family. For example, a husband and wife should each perform their own individual Zakat calculations based on the assets they personally own. 

Superannuation and Pensions 

• Post-Retirement: Zakat is payable in full on pensions (superannuation) received after retirement. 
• Prior to Retirement: For monies set aside in pensions before you retire, Zakat is only payable if the pension assets are being invested on behalf of the holder and if there is a specific quantum of wealth attributed to them. This applies to money purchase schemes but not to final salary schemes. 
• Liability: Your Zakat liability is determined by the nature of the investment (e.g., property or shares). 
• Shari’ah Compliance: If pension monies are able to be invested, care should be taken to choose Shari’ah-compliant investments. 

Shares and Investments 

The intention behind your investment determines how Zakat is applied: 

• Long-term Investment: If you hold shares for dividends without the intention to resell, Zakat is due on the dividend income only. (This assumes Shariah-compliant investments). 
• Capital Appreciation or Day Trading: If your primary motivation is to resell for profit, Zakat is due on the full market value of the shares. 

Generally speaking there are three main approaches to calculating zakat on shares: 

1. The Market Value Approach 
2. The Zakatable Assets Approach 
3. The 25% (Proxy) Approach 

Many people are unsure which of these approaches applies to their shares. 
The correct approach depends primarily on your intention when investing. In other words, why you bought the shares matters. 

Clarify Your Investment Intention 

Before choosing a method, ask yourself: 

• Am I actively trading shares to make short-term profits? 
• Or am I holding shares long-term as an investment, mainly for dividends or long-term growth? 

Your answer determines which zakat approach is most appropriate. 

The Market Value Approach (Short-Term Trading) 

If you buy shares with the intention of short-term trading buying and selling to make quick profits then the market value approach is the most suitable. 

Under this approach, shares are treated in the same way as cash or trade inventory. 

How it works: 

• Take the current market value of your entire share portfolio on your zakat due date. 
• Pay 2.5% on the full amount. 

 Example: 
If your share portfolio is worth $25,000, your zakat would be: 
2.5% × $25,000 = $625 

Important: Zakat is calculated on the current market value, not on what you originally paid for the shares. 

The Zakatable Assets Approach (Long-Term Holding) 

If you hold shares long-term and do not intend to trade them frequently, many scholars allow a more detailed approach: the zakatable assets approach. 

Instead of paying zakat on the full market value of your shares, you look at what portion of the company’s assets are zakatable. 

What counts as zakatable assets? 

Zakatable assets are liquid or near-liquid assets, such as: 

• Cash 
• Inventory (stock) 
• Trade receivables 

You do not pay zakat on illiquid assets such as: 

• Property 
• Buildings 
• Machinery and equipment 

How to calculate: 

1. Review the company’s latest financial statements. 
2. Identify the portion of the company’s assets that are zakatable. 
3. Determine what percentage of the company’s total value those assets represent. 
4. Apply that percentage to the market value of your shares. 
5. Pay 2.5% on the zakatable portion. 

 Example: 

• Your shares are worth $10,000 on your zakat date. 
• After reviewing the company accounts, you determine that 19% of the company’s assets are zakatable. 
• Zakatable portion: 19% × $10,000 = $1,900 
• Zakat due: 2.5% × $1,900 = $47.50 

This calculation would then be repeated for each shareholding in your portfolio. 

The 25% Approach (Simplified & Safe Proxy) 

The 25% approach is a simplified version of the zakatable assets method. 

It is designed for those who: 

• Hold shares long-term, but 
• Do not have the time, expertise, or access to detailed company financials 

Instead of calculating the exact zakatable assets, you assume that 25% of the company’s value is zakatable. 

How it works: 

1. Take the current market value of your shares. 
2. Assume 25% of that value is zakatable. 
3. Pay 2.5% on that amount. 

Example: 

• Your shares are worth $10,000 
• Zakatable portion (25%): $2,500 
• Zakat due: 2.5% × $2,500 = $62.50 

This method is considered a safe and cautious approach and is endorsed by several scholars and Zakat institutions. At National Zakat Foundation, we have undertaken detailed analyses and concluded that 25% is a reasonable proxy for zakatable assets in many companies. 

Final Reminder 

• All the above approaches and investments MUST be based on a sharia compliance portfolio.   
• Zakat is always calculated based on the market value at the time of payment, not the original purchase price. 
• Different approaches apply to different investment intentions. 
• If you are unsure which approach best suits your situation, we encourage you to reach out to our Zakat expert team for personalised guidance. Book a Zakat Consultation here.

Superannuation 

Superannuation is a relatively new asset class. NZF adopts the view that Zakat is due on the value of voluntary contributions made during that Zakat year, provided the owner has some ability to dictate how the assets are invested. 

• Example: If your Zakat date is the 20th of Ramadan, you pay Zakat on the value of your voluntary contributions made between the 21st of Ramadan last year and the 20th of Ramadan this year. 
• Check your superannuation statement to distinguish between your contributions and your employer’s. In personal super plans, all individual contributions within the Zakat year should be counted. 

Property 

There is no Zakat on the home you live in. However, Zakat may apply to other properties: 

• Rental Property: Zakat is due on the rental income (minus expenses like rates, maintenance, and agent fees). 
• Resale Property: If you own property with the intention to resell it within this Zakat year for capital gain, you must include the property's value in your calculation. 
• No Intention: If you own a property but have no intention to rent or sell it, no Zakat is due. 
• Inherited Property: The same rules apply to inherited assets. 

Payment Note: If a property is on the market but remains unsold and you lack the cash to pay the Zakat, you must pay the amount once the property is sold (according to the Maliki school). 

Property Examples and Deductions 

If a person owns three houses, one for personal use, one for retired parents, and one for rent - Zakat only applies to the rent of the third house, provided it reaches the Nisab and a Hawl (lunar year) has elapsed. 

How to calculate based on use: 

• Residence: No Zakat due. 
• Business/Trade: No Zakat on the property itself, but Zakat is due on business goods and profits. 
• Rental Property: Zakat is due on the rental return minus expenses like property taxes, council fees, maintenance, real estate agency fees, and security charges. 

Inheritance and Delayed Sales: These rules also apply to inherited property. If a property is on the market but remains unsold and you lack the cash to pay the Zakat, you must pay the Zakat once the property is sold (according to the Maliki school). 

Shared Ownership 

If a property is jointly owned, the partners should pay the combined Zakat. This follows the guidance of Abu Bakr (may Allah be pleased with him), who noted that the property of partners is considered together as one for the purposes of Nisab. 

The following Hadith clarify Zakat for joint holdings: 

روى انس بن مالك أَنَّ أَبَا بَكْرٍ ـ رضى الله عنه ـ كَتَبَ لَهُ الَّتِي فَرَضَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏"‏وَمَا كَانَ مِنْ خَلِيطَيْنِ فَإِنَّهُمَا يَتَرَاجَعَانِ بَيْنَهُمَا بِالسَّوِيَّةِ"‏. 

Narrated Anas (may Allah be pleased with him): Abu Bakr (may Allah be pleased with him) wrote to me regarding what Allah’s Messenger ﷺ made compulsory concerning Zakat. In it, it was mentioned: "If a property is jointly owned by two partners, they should pay the combined Zakat, and it will be regarded as if both of them have fulfilled their Zakat equally." 

روى انس بن مالك أَنَّ أَبَا بَكْرٍ ـ رضى الله عنه كَتَبَ لَهُ الَّتِي فَرَضَ رَسُولُ اللَّهِ صلى الله عليه وسلم ‏ "‏ وَلاَ يُجْمَعُ بَيْنَ مُتَفَرِّقٍ، وَلاَ يُفَرِّقُ بَيْنَ مُجْتَمِعٍ، خَشْيَةَ الصَّدَقَةِ ‏"‏‏.‏ 

Narrated Anas (may Allah be pleased with him): Abu Bakr (may Allah be pleased with him) wrote to me what was made compulsory by Allah's Messenger (ﷺ) regarding Zakat: "Neither the property of different people may be taken together nor the joint property may be split for fear of (paying more, or receiving less) Zakat." (Sahih al-Bukhari) 

This indicates that the Nisab of partners in a property is considered together as one property. 

The Importance of Intention 

Your primary intention for owning an asset is crucial. For example, with a car: 

• Personal Use: If bought for personal use, but you would sell if offered a "good price," no Zakat is due. 
• Resale: If bought with the intention to resell, even if you use it in the meantime, Zakat is due. 
• Change of Heart: If you intended to sell but decided to keep it for personal use before the year passed, the Zakat obligation is removed. 

A Serious Reminder 

Calculating Zakat can feel daunting, but it is a fundamental obligation. Just as we ensure our taxes are paid to avoid government penalties, we must ensure our Zakat is paid to avoid consequences in the Hereafter. 

Ready to calculate and pay your Zakat?

Use our online resources to calculate and pay your Zakat today: 

• Zakat Calculator – Click Here 
• Zakat Payment – Click Here 

All donations over $2 to NZF are 100% Tax Deductible. If you require a tax invoice, please email us at finance@nzf.org.au.