Q. I have heard a number of positions on the zakat ranging from 2.5% on gross income before taxes, as well as savings, valuables including jewelry, etc. to just 2.5% on one's savings after all expenses are taken into account. Some have proposed as much as 10% on returns. Which is correct? If a person has a retirement savings plan (401k) or any other pension plan, is he/she required to pay zakat on the accumulated amount?

A. The zakat amounts are not stipulated in the Qur'an, so the juristic rulings come from hadith and qiyas. It would seem that investments are deemed to come under the rubric of commodities which take care of themselves, such as crops which are not watered by the landowner, but derive their water from natural springs, rain, or similar sources. According to the hadith of Salim b. Abdullah in Bukhari, such crops have a 10% levy on them. Unless one takes the modernist position we have outlined below, we see no great reason to argue with the qiyas of the jurists on the net amount of such investments.

Since all zakat calculations come from hadith and legal reasoning, a lot of what is payable relies on ijtihad, and this may vary according to place and other considerations. For example, according to the hadith of Anas reported in Bukhari, we are told that anything of 190 dirhams and lower may be done so at the option of the owner. The obligatory amount of 2.5% was set for whoever had 200 and more dirhams. Now this was for the time of the Prophet (s), so by what yardstick do we measure if these 200 dirhams were considered an amount of considerable value, or was it barely above the poverty line? There are other hadith too that denote that the property in question must be in the possession of the payer for more than a year. Adjudging correctness of the positions you mentioned is problematic since the zakat is not only a societal duty, but one relating to the kindness of the heart. For this reason, we see that in the hadith mentioned above, even though the Prophet exempted those below a certain level of possessions from paying the zakat, he nonetheless left the choice up to them.

This removes the paying of zakat from the legal hairsplitting of the jurists. At the same time, Allah, as will be noted in the verses in the Qur'an relating to fasting, etc., tells us that He wants that which is easy for us and not that which is difficult. The same Allah tells us that we will not attain true piety until we spend out of that which we love the most (Q3:92). So as far as the issue of calculating goes, we would leave it up to the person involved, and this consideration obviously goes along with his/her income and the amount of expenses s/he faces. Zakat is to be paid on the minimum amount that one can calculate, and this is obviously after all expenses on the zakatable commodities are deducted. If one is in a position to pay more than this, i.e. to calculate on the gross value, then it is a matter between that person and his/her Lord.

As regards pension schemes, retirement plans, etc., to the best of our knowledge and judgment it would seem that since such plans are only taxed at maturity, then zakat should be paid at maturity as well, instead of on an annual basis. Many of those funds / schemes derive their profit from investments which may lose in some years, and gain in others. The actual value of our contributions then may not be consistent with its dollar amount. It ought to be noted that the governmental system of taxation that we have in the western world is in order to fulfill many -- indeed all of the same things -- for which zakat is collected. Therefore, it would seem sensible to make analogies where necessary on certain points, such as what is deemed taxable and what is not. Certain modernists have gone as far as saying that the modern system of taxation should be seen as zakat, since despite what the jurists say, there is nothing in the Qur'an that stipulates absolutely that the zakat is for Muslims only. Even in such a situation, we know that some of our tax dollars go towards helping Muslims on welfare, etc., supporting Muslim countries, and so on, and we certainly spend more than 2.5% in taxes.

Therefore, a Muslim, the modernists argue, if s/he sticks to the traditional system, ends up paying two taxes -- zakat plus the governmental one. Is this just? Their argument, in our perception, is a valid one. However, we hesitate to adjudge it correct, since to do so would raise several issues. The governments, being secular, spend our money on things that we do not condone, and if we neglect the traditional zakat, many Muslims in many countries, deemed as "pariah countries" by our governments, may be left unassisted. It is for this reason then that we provide the information that we have, and leave the matter to the judgement and conscience of the individual Muslim. Each one of us will be judged according to our private understanding of Allah's laws. And Allah knows best.

(Click here for a related answer)