Zakat on Property & How to Calculate it?

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Zakat, one of the five pillars of Islam, is a religious obligation for all those Muslims who possess a set amount of wealth and assets for a specific period. If a Muslim fulfills fixed financial criteria, the nisab, he or she has to pay a specific sum of money to the needy and underprivileged people, according to the doctrine of Islam. 

The primary objective of zakat is to cleanse the wealth and to provide the less fortunate with financial support. Like other tangible and intangible assets, real estate property is also a tangible asset that is included in the nisab (financial criteria) for which you have to pay zakat.

Property Tax and Nisab

The zakat that you pay on your property depends solely upon the nisab. This is not the case in property tax. It has an entirely different collection method and criteria.

Nisab of zakat is a minimum amount of money or wealth that is held for at least one year by the owner. The nisab by the gold standard is 3 ounces of gold (87.48 grams) or its cash equivalent. The nisab by the silver standard is 21 ounces of silver (612.36 grams) or its equivalent in cash or any other form of asset.

Note: Please keep in mind that the price of gold and silver change with time. Before making your zakat calculations, kindly refer to the latest gold and silver rate in your country. Read real estate vs gold where you should invest.

zakaat on property

When is Zakat Applicable to the Property?

Zakat is only applicable to certain types of properties. Usually, zakat applies to properties that will further be used for rentals and reselling. In other words, all the capital assets which generate income are subjected to zakat.

Land for Reselling

If the land is brought to resell, then treat it as a commercial good. The property will be liable to zakat according to its current value on the owner’s zakat date.

Building for Reselling

If you are building a residential building for reselling then you have to pay zakat for it. The money you receive for the parts you sell is liable to zakat at the rate of 2.5% on the day you receive the money. For later years, it is part of your money and it is subjected to zakat in the normal way.

Some people prefer residential properties over commercial properties and vice versa. In short, the ‘commercial real estate vs residential real estate’ debate is always under the limelight.

Plots

There is no zakat on plots purchased to build houses for giving out on rent and earning income. But there will be zakat on the savings from the rental income just as any other income if the income exceeds the nisab criteria. Some people prefer saving over investing. If you are confused between them read saving vs investing which one is a better option.

property zakat

When is Zakat Not Applicable to the Property? 

Unlike the above-mentioned properties, certain properties cannot be subject to zakat. 

Residential Properties

Zakat does not apply to properties that you use for your personal use. There is no zakat for residential property where you are living with your family. These pieces of real estate are necessities, not a source of generating a stream of income. 

For example, you need a house to live in. Therefore, you are not liable for zakat. Also, If you are building a house for your residence then there is no zakat on property under construction. Read contractor vs architect who to hire to remodel your house.

Investment Properties

Zakat on a real estate investment property is dependent on the income you are getting from it. Zakat does not apply to the commercial properties that you are using to execute any business idea. These buildings include shops, showrooms, factories, or any office building. Get to know house vs shop where to invest. However, you may or may not have to pay zakat on the earnings from these properties, depending on the nisab criteria.

Agricultural land

Moreover, if you own agricultural land, you are not supposed to pay zakat for it. However, if you have savings generated through the agricultural land and it exceeds the nisab criteria, you have to pay zakat. 

Land Ownership

If you expect to sell the land you own in full within months or a year, then you must calculate its value and pay zakah for the full value at the rate of 2.5%

In case of plots that you have not paid in full, the zakat will only be applicable for what you have paid for. For example, consider the zakat on an installment property. if you have paid 40% of the price of a plot, then you will calculate your zakat based on this 40% of the amount that you have already paid. To know about available listings of plots for sale in Islamabad, visit Graana.com today.

Development Properties

If you have a land that is intended to be used for development is not liable for zakat because later on, it becomes a part of capital assets. 

A land kept for years before re-sale, intended always for selling at the right price, is not liable to zakat until it is sold. On receipt of the price, zakah is payable on the whole amount received, once only.

How to Calculate Zakat on the Property?

The zakat calculation on the real estate property is simple. You just need to understand your asset value and how nisab works and you are good to go.

property tax calculator

Understanding Nisab

Zakat is always calculated by taking into account the nisab. Nisab is the minimum amount that a Muslim must have before being obliged to give zakat. The Nisab according to the gold standard is 3 ounces of gold (87.48 grams) or its cash equivalent. The nisab by the silver standard is 21 ounces of silver (612.36 grams) or its equivalent in cash. 

However, the prices of gold and silver changes with time. Before calculating the zakat, research the current market price of gold and silver and calculate the zakat accordingly. There are many investment options in Pakistan but people are always confused between investing in real estate or stocks and investing in real estate or mutual funds. Real estate because of the high degree of control associated with the property is preference for some people.

Steps to Calculate Zakat on the Property in Islam

  • First of all, calculate and review all the assets and cash that you own. This will give you a clear picture of your nisab. 

List all the property assets that you own for one year or more. These are the properties that are eligible for zakat. If you own real estate property for less than one year, it does not fall under the obligation of zakat. 

  • Now, calculate the sum total of your assets and multiply it by 2.5%. This is the percentage of zakat.

Let us consider the following example for a clearer understanding.

Total value of your property: Rs.15,00,000.

Calculating zakat: Rs.15,00,000*2.5%= Rs.37,500.

Hence, the zakat amount is Rs.37,500 which you can pay throughout the year.

  • Distribute the zakat into needy and less fortunate people. According to Islam, you can give zakat to the following people.
  • The Poor (people who have no means to earn a livelihood)
  • The Needy (people cannot fulfill their basic needs)
  • The Zakat collectors
  • Recently converts in Islam
  • Stranded travelers
  • Those people who are working for the religious cause
  • Slaves
  • People who have debt. 

Zakat is obligatory for all practicing Muslims who fulfill the criteria of nisab. Let’s fulfill this religious obligation and help the poor and less fortunate people of our society.

We hope this article was a source of information for you. If you have any questions or unclarity regarding zakat on the property, leave us a comment in the comment section below. We will be more than happy to assist you.

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