In trading business, 2.5% Zakat will be applicable on trading inventory (maal-e-tijarat) as at the date when “Zakat on Wealth” is to be calculated. Total Zakat would be 2.5% of cash-in-hand plus cash-in-bank plus value of stock-in-hand and any other form of asssets/wealth (their market value as at the date when Zakat becomes due). Value of obsolete stock can be deducted from the total value of stock-in-hand (Zakat is applicable only if total value is above the set Nisab for Zakat excluding value of items for personal use).

For further details, Please refer to the video below from 1:17:23 to 1:18:45

https://www.youtube.com/live/cQn9tcHEoq8?feature=share&t=4643

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Please also refer to the video below from 55:22 to 58:07

https://youtu.be/kh-kRZP6g1U?t=3322

There are two major domains of Zakat namely ‘Wealth and Production’. For production, zakat applies on gross amount as soon as production happens, while for wealth, zakat applies once a year on a fixed date on all the wealth (excluding exemptions: (i) items of personal use and (ii) means of production). This is as per established Sunnah of Prophet (SWS) for wealth and Production.

When production occurs, the zakat becomes due immediately on the gross amount (irrespective of the fact when one actually pays it). Salary being a form of Production is an ‘ijtihadi ilhaq‘ done by Ghamidi Sahab. However, one can calculate it on yearly gross earning and can pay it in installments as well. The only expenses that can be deducted from gross production/gross receipt are those which are incidental in acquiring ownership of that particular form of means of production and/or are substantial expenses in maintaining/sustaining that particular form of means of production (For Details: Discussion 50336 • Reply 50354 AND refer to the link provided from 1:15:19 to 1:16:38 https://www.youtube.com/live/apcKbzBbQow?si=gYMAH6DwJDP-2O4a&t=4519)

After payment of that Zakat, whatever left is one’s wealth. And if that wealth still stays with the person till the year-end i.e. the date fixed once a year for calculation of Zakat on wealth, then the whole wealth is subject to Zakat (that production earning as well which has become wealth of a person now). If one spends the same wealth one day before the year-end date, then there is no wealth zakat on that wealth. Both these heads are subject to Zakat only if they reach the set Nisab for Zakat Obligation.

Nisab:

– Nisab for production / earnings is the minimum amount below which your state exempts tax or zakat on earnings. If your state does not provide a nisab then you can use the standard nisab of 653 kg of Dates or equivalent value.

– Nisab for assets/wealth is the minimum amount below which your state exempts tax or zakat on assets. If your state does not provide a nisab then you can use the standard nisab of 642 grams of silver or equivalent value.

However, there can be difference of opinion on whether Zakat percentage should be applied on amount only above Nisab threshold or on the whole amount as soon as it crosses the Nisab threshold. Please see these responses of Ghamidi Sahab in this regard:

Discussion 988 • Reply 31187

Discussion 988 • Reply 36937

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You can calculate Zakat in the following manner:

1. Fix any one day of the year for the calculation of Zakah. On all subsequent years, Zakah should be calculated on this day.

2. Subtract the value of 642 grams of silver from your total wealth on this particular day which includes all your assets as at that date except items of personal use and tools of production.

3. 2.5 % of this amount is the Zakah to which you are liable. In case you are a salaried person you should also pay 10 % of your salary every time you receive it [See FootNote 1]. You can deduct the amount the government has fixed as exemption to salaried persons and then pay the said percentage of the remaining amount as Zakah. (In case there is no tax exemption slab available, then one can use amount equivalent to 653 kg of dates as Nisab for Salary earnings.)

Remember, if it is not possible to pay your Zakah money in one go you can pay in installments as well.

4. Since Zakah is the only tax which a government can impose on its citizens, you can deduct other taxes that you have paid from your Zakah amount. If the balance is negative you do not have to pay Zakah.

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[FootNote 1]: If the basis of the Sunnah established in Zakah is taken into consideration, production of all forms based on various skills must be classified as produce and not as wealth; therefore, its rates should be those specified by the Prophet (sws) for land produce.

Rates for Produce: (i) 5% : on all items which are produced by the interaction of both labor/maintenance expenses and capital, (ii) 10%: on items which are produced such that the basic factor in producing them is either labor/maintenance expenses or capital and (iii) 20%: in items which are produced neither as a result of capital nor labor/maintenance expenses but actually are a gift of God.

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You being owner of a trading business, the only Zakat applicable to you is ‘Zakat on Wealth’ at year-end. There is no Zakat on Salary for you in this business unless you have a salary source from somewhere else, in that case Production Zakat will be applied to your salary as well. Please refer to my first response again for Zakat on Trading Business.

Details on Law of Zakat and FAQs:

Discussion 46733

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You may enter appropriate numbers in our Zakat Calculator after reading the description for each box. When you reach the end, it will generate a statement showing you exactly what you owe after any applicable deductions, and what percentage was applied to each category. It’s also a great way to learn the sharia of zakat.

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