Loans and debts

I have debts. Do I pay zakat?

The basic principle is that debts are deducted from wealth, and if the remainder is still above the nisab threshold, zakat is payable, otherwise not.

However, if a person has a large debt that is being paid off in instalments, such as a mortgage or large credit card debt, then one should only deduct that month’s payment.

Example:
Zubair possesses assets worth £10,000, but owes his creditors a total of £7,000. When his zakat year has elapsed, he will pay zakat on £3,000.

Shuayb has savings of £2,000, and an £80,000 mortgage which he pays in monthly instalments of £400. His zakat date comes round just as his monthly payment is due, so he pays zakat on £1,600.

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Related questions

I lent money to someone, do I pay zakat on it?

Yes. You can either pay zakat for every year that passes until you receive the loan back.

Alternatively you can wait until you receive the loan and then pay the accumulated zakat in one go.

If the loan is insecure and you are not sure whether the borrower will be able to pay you back, it is better to delay the zakat payment until you receive it, at which point the zakat accumulated over the years will be payable. If you never receive the money back, no zakat is payable.

Someone owes me money for work I did for him, do I pay zakat on it?

No zakat is payable on money you are owed for work done until you receive the payment.

Similarly, zakat is not payable on a dowry that you have not yet received, or an inheritance share that you are due but has not come into your possession.

Do I pay zakat on my pension fund?

There are 2 ways in which a pension can be funded:

1) Payments are deducted from a salary before it comes into the possession of the contributor.

2) The contributor makes payments from money that has already come into their possession.

If the payments are deducted from the salary at source, so that the money never comes into the possession of the contributor, no zakat is due on the payments, nor is it due on the amount that accumulates in the pension or provident fund.

Zakat will only become payable when money from the fund is paid out and received by the contributor.

If the pension payments are made after the money has come into the possession of the contributor, then zakat is payable on the money that accumulates in the fund.

I have taken out large commercial loans to expand my business, how will this affect my zakat calculation?

A loan you have taken out to acquire zakatable assets, such as raw materials, goods and so on, can be deducted from your capital. You pay zakat on what remains.

A loan you have taken out to acquire non-zakatable assets, such as furniture, machinery and buildings are not deductible.

Zakat