How is zakat paid on shares and investments?

The line that decides everything

Every ruling here turns on one question: did you buy these shares to sell them, or to keep them? The scholars call the first 'urud al-tijarah — goods held for sale — and the second istithmar, investment for income. The intention at purchase is what counts, not what you might do later.

Shaykh Ibn Baz put the distinction plainly: shares prepared for trade are zakatable like any other trade goods — land, cars and the like — while shares held in property meant for renting rather than selling carry no zakat on the shares themselves, only on the rent once it reaches the threshold and a year passes over it.

Shaykh Ibn Uthaymeen added a practical note on the same point: if someone merely parked his money in land to preserve it, and would only sell in need, there is no zakat — it was never trade goods, nor a category zakatable in itself.

When they are held for trade

Here the shares are treated exactly like a merchant's stock. You value them at their market price on the day the year completes — not at what you paid — add the profits, and pay one-fortieth.

Shaykh Ibn Baz explained why the purchase price is irrelevant: if a share was bought for ten thousand and is worth twenty thousand when the year completes, you pay zakat on twenty thousand; if it dropped to eight or seven thousand, you pay on the lower value. The consideration is the value at the moment zakat becomes due.

Al-Tuwayjiri sets out the same method in Mawsu'at al-Fiqh al-Islami: on the day zakat falls due, the trader gathers his capital, profits, the value of his goods and the debts he expects to be repaid, then deducts what he owes, and pays one-fortieth of what remains. He gives a worked example — one hundred shares bought at fifty riyals, worth five hundred at the time zakat is due, so fifty thousand riyals in market value, and the zakat is one thousand two hundred and fifty riyals.

When they are held for income

If the company's assets are fixed — buildings, equipment, machinery — and your aim is the annual return, the zakat is on the profits alone, not on the shares. Al-Tuwayjiri compares this to rented property: zakat is due on the rent, not on the building itself.

The Permanent Committee gave the same answer for a family living on the annual yield of their shares: if the shares are fixed holdings in an electricity or transport company, zakat is due on the yield when it reaches the threshold and a year passes; if they are trade ventures seeking profit, zakat is due on the capital with its profits, the profit following the capital's year.

The threshold and the year

The nisab (the minimum wealth at which zakat becomes due) is the value of 85 grams of gold, or 595 grams of silver, as IslamWeb and al-Tuwayjiri both state. The year is the lunar hijri year, counted from when your wealth first reached the threshold.

Two practical points the scholars address:

• A fluctuating price does not excuse you. IslamWeb (fatwa 102844) notes that the value changing daily is no obstacle, because zakat is calculated on one specific day — the day the year completes over the threshold. On that day you value everything you hold and pay on it, whatever the total.
• If you cannot reconstruct past years, IslamWeb (fatwa 303382) advises reviewing your account statements with the company for each year; if that is impossible, estimate what most likely was due, and that discharges your obligation, since Allah does not burden a soul beyond its capacity.

If the profits are not lawful

Where the earnings are interest (riba) rather than lawful trade profit, the treatment changes. IslamWeb (fatwa 19962) states that such profits must be disposed of by spending them in good causes, and zakat is then paid on the value of the shares alone. IslamWeb (fatwa 102844) adds that the view adopted on the site — and the position of the majority of contemporary scholars — is that buying shares in companies dealing in riba is not permitted in the first place.

If the company pays zakat itself

Some companies have a body that discharges zakat from the profits. IslamWeb (fatwa 102844) distinguishes two cases: if that body pays zakat on the shares and their profits out of the profit funds, there is no objection and it suffices you. If it pays on the profits only, that is not enough — zakat is due on the profits and the capital together.

Shaykh Ibn Uthaymeen noted that for shares in large companies, the government collects the zakat, and what it collects falls in its proper place and clears the obligation. For smaller companies where no one collects it, you must pay it yourself.

Key takeaways

• Your intention at purchase decides the method: shares bought to sell are trade goods, taxed on market value plus profit; shares bought to hold are taxed on income only.
• Value them on the day the year completes, not at the purchase price — a rise or fall changes what you owe.
• The rate is 2.5% (one-fortieth) once the holding reaches the value of 85 grams of gold or 595 grams of silver and a lunar year passes.
• Unlawful interest earnings are not zakatable profit — they are removed by spending them in good causes, and zakat is paid on the shares alone.
• If a company pays zakat on both capital and profit, that discharges you; if only on profit, it does not.

Further reading

• Al-Tuwayjiri, Mawsu'at al-Fiqh al-Islami, the chapter on zakat on trade goods and shares
• Ibn Baz, Tuhfat al-Ikhwan, the section on zakat on shares
• Ibn Baz, Fatawa Nur 'ala al-Darb, the section on how zakat on shares is paid

And Allah knows best.