Should I Pay Zakat on Investments I Have Made?

Answered by Shaykh Umer Mian

Question: Assalamu alaykum

I have a certain amount of cash that I have given to my friend to invest in his business, I had that amount for a year with me and then transferred it to him to invest. Does this wealth require zakat to be paid? And currently, I am unemployed and don’t have any other source of income.

Answer: Wa alaikum as-salam wa rahmatullahi wa barakatuhu

Short answer:

If you intended to transfer ownership of those funds to your friend, your friend pays the zakat. If you intended your friend to merely act as an agent (wakeel) to invest the funds on your behalf, then you pay zakat on those funds. Whoever has to pay the zakat should calculate it according to the method detailed below.

Detailed Answer:

First of all, the principle underlying the obligation of zakat has been summarized as follows:

“Zakat is only due if one possesses a net zakatable amount above and beyond one’s debts and immediate (one-month) expenses after a zakat-year has passed since first possessing such an amount.” (Shaykh Faraz Rabbani, may Allah preserve him, in one of his past answers).

Secondly, there are two parts to your question. The first pertains to the year you were in possession of the cash, prior to giving it over to your friend. During that year, the cash you had must certainly be counted from your assets. You should do the calculations described below to determine whether you owe zakat for this year.

The second part of your question pertains to what happens after transfering the cash to a friend to invest. Based on your intention at the time of transferring the funds, the following is possible: A) you intended to make your friend your agent (wakeel) to invest the funds on your behalf, or B) you intended to transfer ownership of the funds to your friend. In latter scenario, the funds would be considered a gift (hibah) and your friend would become the owner of the funds from the time of transfer. Hence, after the transfer, no zakat would be due on you in relation to those funds. Rather, your friend would have to calculate and pay zakat on those funds from that point on.

Since you have asked regarding your own zakat obligation, it seems more likely that you intended scenario A. That is, the friend is merely acting as an agent (wakeel) on your behalf, while the funds remain yours. In this case, you must calculate and pay zakat on those funds, in the same way as described above. One must always remember that paying zakat from any given wealth is the responsibility of the owner of that wealth (malik), and not the responsibility of the one to whom it is given for a specific duration. Phyiscal possession is not necessary for the obligation of zakat. Rather, if one has full control over the funds and they are redeemable whenever one desires, the funds are considered to be in one’s possession and zakat will due on them.

Lastly, you have indicated that you are unemployed without any other source of income. Even in that situation, zakat may still be due. In order to determine zakat due, you must add up your zakatable assets for a given year. Zakatable assets include cash, bank balances, investment and retirement accounts, gold, silver, and trade goods (i.e. goods purchased for resale, not for personal use). Any property acquired for personal use (including homes, cars, furnishings, personal effects, etc.) is not from one’s zakatable assets. From the total zakatable assets, subtract your debts, including immediate (one-month) expenses for yourself and your dependents. If the resulting amount is more than the nisaab, then you must pay 2.5% of that amount as zakat for that year. Note that the nisaab is the minimum amount of wealth upon which zakat is due, and it equals 612.32 grams of silver or about $302 (according to the current market price for silver).

Wassalam,
[Shaykh] Umer Mian