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.

Criteria for Calculating Zakat on Cash

Regarding cash and bank balances, the following are the criteria for determining Zakat:

1. Cash in Hand: Zakat is calculated at 2.5% of the actual value of cash you possess.
2. Cash in Bank Accounts:     

• Savings Accounts: Zakat is due at 2.5% of the balance in your savings account.
• Current Accounts: The same percentage applies to the balance in your current account.
• Fixed Deposits (FD): Zakat is applicable to the amount held in fixed deposits.
• Fluctuating Balances: Although bank balances may vary due to personal needs, Zakat is calculated based on the average balance throughout the year.

Duration: The funds should ideally remain in the bank for a full year to qualify for Zakat.

Zakat Percentage on Cash

When it comes to cash holdings, many Muslims are stuck with this question: what is the percentage of zakat on cash?

Zakat is levied at a fixed rate of 2.5% on the total balance present in one's savings, current, or fixed deposit accounts. 

This means that regardless of the source of income, whether it be salaries, business profits, or any other form of monetary gains.

When cash reaches the zakat nisab, equivalent to 85 grams of gold, and stays with the owner for a lunar year, Zakat is due. 

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 is not applicable to funds used for immediate expenses or essential needs. 

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

Zakat on Cash and Bank Balances

There are two categories of deposited funds in banks:

• Funds deposited in Islamic banks, where Zakat is applicable on both the principal amount and profits.

Therefore, upon the completion of a lunar year on the principal amount meeting the Zakat threshold, Zakat becomes due on the entire principal amount and the accrued profits.

• Funds deposited in banks that engage in interest-based transactions. Zakat is only obligatory on the principal amount in such cases.

Interest is deemed impermissible and impure, thus not subject to Zakat. Additionally, it's impermissible to allocate interest for Zakat payment.

Zakat on Cash Savings

The Zakat rate on cash savings stands at 2.5%. 

For instance, if your cash savings amount to Rs. 1,000, you're required to contribute Rs. 25 to charity. It's important to note that Zakat differs from taxes, as Zakat is a religious duty, whereas taxes are governmental obligations.

Zakat on Cash that is Invested in Trade

Zakat is obligatory on wealth invested in trade. If a Muslim has owned such wealth for a lunar year, Zakat becomes due on it, whether it's in hand or invested.

If any profit is earned during the same lunar year, Zakat for that profit is due when Zakat on the original amount is paid.

Zakat on Stocks and Investments

Zakat is obligatory on stocks and investments.

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 compensations.

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 lunar year completed, a portion of this wealth is allocated for those in need, fostering equity and compassion within the community. 

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