How to Calculate Zakat on Cash?

Many Muslims often struggle with the difficult task of calculating Zakat on their cash holdings.

The uncertainty and complexity surrounding this obligation can lead to confusion and anxiety. To ease this burden, we provide a simple formula and example, making the calculation of Zakat on cash straightforward and accessible.

Let's understand the specific formula and steps in determining the Zakat amount owed on cash holdings.

Formula of Zakat Calculation on Cash

The formula for calculating Zakat on cash is as follows:

Example:

Here is an example of how to calculate zakat on cash in rupees.

Let's assume a person has the following cash assets:

Cash on Hand: Rs. 50,000
Cash in Savings Account: Rs. 100,000
Cash in Current Account: Rs. 30,000
Cash in Fixed Deposits: Rs. 70,000

Total Cash Assets = Rs. 50,000 + Rs. 100,000 + Rs. 30,000 + Rs. 70,000

                                        = Rs. 250,000

Zakat Amount = Rs. 250,000 * 2.5%

                                = Rs. 6,250

Therefore, the Zakat amount on cash assets amounting to Rs. 250,000 would be Rs. 6,250.

Note: It's important to ensure that the wealth is rightfully owned and that there are no outstanding debts or obligations tied to it. Additionally, Zakat does not apply to funds used for immediate expenses or essential needs. 

Therefore, individuals are encouraged to calculate their Zakat accurately and fulfill this religious obligation accordingly. 

Conditions for Paying Zakat on Cash

Before calculating Zakat, it's important to ensure the following conditions are met:

• The cash must be fully owned
• It must be held for one full lunar year (hawl)
• The total amount must exceed the Nisab threshold (value of 85 grams of gold)

Zakat on Different Types of Cash Assets

Zakat is due on all cash assets, whether kept in hand, stored in bank accounts, or invested in trade. 

However, to be eligible for Zakat, the following conditions must be met:

1. Zakat on Cash in Hand

Physical cash you possess at the end of the lunar year is Zakat-eligible if it meets the conditions above.

• Zakat Rate: 2.5% of the total cash in hand

2. Zakat on Bank Balances

Zakat is also applicable to money held in the following bank accounts:

• Savings accounts
• Current accounts
• Shariah-compliant fixed deposits

If your account balances fluctuate throughout the year, you may:

• Calculate Zakat using the average balance, or
• Use the year-end balance, if it remained consistently above the Nisab

Islamic Banks:

Zakat is due on both principal and profits, once the amount exceeds the Nisab and a full lunar year has passed.

Interest-Based Banks:

Zakat is only due on the principal amount. Interest is considered impermissible in Islam and cannot be used to pay Zakat.

3. Zakat on Cash Savings

Cash savings held for a full lunar year and exceeding the Nisab are also subject to Zakat.

Let's say you have a total savings amount of 1 lakh Rupees. Then, how much Zakat is on 1 lakh rupee? 

Calculate 2.5% of the total cash savings:

Zakat = Total Cash Savings × Zakat Rate

Zakat = 1,00,000 × 0.025

• Zakat = 2,500 Rupees

So, in this example, the Zakat due on your cash savings of 1,00,000 Rupees would be 2,500 Rupees.

4. Zakat on Cash Invested in Trade

Cash that is invested in business or trade is also Zakat-eligible, including profits earned during the year.

• Zakat is calculated on the total value of business goods and profits at the end of the lunar year.
• If both the capital and profit remain with the owner for one lunar year, Zakat is due on the full amount.

5. Zakat on Stocks and Investments

Zakat is obligatory on:

• Stocks and shares (ownership in a company)
• Bonds or investment instruments (if Shariah-compliant)

According to Muslim scholars, shares and stocks represent a share in the capital of a company or business entity.

They categorize shares and stocks as contributions to capital, subject to fluctuations, much like bonds, which are contractual financial instruments with specified terms and compensation. Consequently, both types of wealth possess a market value susceptible to fluctuations, necessitating the payment of zakat.

In conclusion, the obligation of Zakat on cash, whether it be in hand or in various bank accounts, is a crucial aspect of Islamic finance. With each passing lunar year, a portion of this wealth is allocated to those in need, fostering equity and compassion within the community. 

At Pakistan Sweet Home, every child arrives with a different story—some with loss, others with silent pain. Your orphanage donation helps us provide healthy food, quality education, a safe and caring environment, clothing, healthcare, and arrangements for extracurricular activities. It’s a simple way to bring normalcy back into a child’s life when everything else has changed.

Support Orphans with Your Zakat

Donate Zakat Now