Zakat: Eligible for Tax Rebate

Meaning and Purpose of Zakat

Zakat, one of the five pillars of Islam, plays a crucial role in supporting those in need, and it can be defined as the act of cleansing or purifying something.

According to the hadith of the Prophet (SAW):

“When you have 200 dirhams and you have enough haul (an even year or a whole Hijriah year), it is obligatory to pay zakat of five dirhams, and it is not obligatory to pay zakat unless you have 20 dinars.” If you have 20 dinars and have enough haul, it is obligatory to pay half a dinar in zakat. The same is the rate if the value increases and no zakat is required for a property except for an even year.”(Narrated by Abu Dawud and al-Baihaqi)

Based on this hadith, converting the value of half a dinar (0.5) of the total value of 20 dinars is set at a rate of 2.5%. Therefore, the rate for zakat on your investment is 2.5%, similar to zakat on your assets. The concept is similar to how you pay zakat on your income. Once you receive your profits from investment and it fits all the requirements, you are obligated to pay zakat.

Among the types of zakat that must be paid are zakat on income, zakat for investment, zakat for your wealth, and zakat for gold.

What are The Requirements to Pay Zakat on Investment?

• Islam - Zakat is prescribed only for Muslims.

• Complete Ownership - Complete ownership of the wealth with no one else having a claim on it.

• Sufficient Nisab - The minimum threshold determines whether wealth is subject to zakat. Each category of wealth has its nisab. For example, the nisab for zakat on income, business, savings, stocks, and gold is based on the value of 20 mithqal (85 grams of gold).

• Adequate Haul - Ownership for an entire year, which is 365 days.

• Growth Potential - The wealth subject to zakat must have the potential to grow.

When the wealth one possesses meets the conditions for zakat obligation, zakat must be given.

For example, if you have savings in gold exceeding 85 grams, zakat must be paid based on the current value of that gold.

ASB investors must also pay zakat if the total investment exceeds the specified nisab. For instance, if you have RM200,000 in ASB and receive 5% dividend totaling RM10,000, you must pay zakat RM5,250 based on the calculation of 2.5% x RM210,000 = RM5,250.

However, if your investment does not reach the specified nisab, which is RM21,626.00 (per the 2023 nisab reference set by the zakat collection center-MAIWP), you are not required to pay zakat for your ASB investment.

Instead, you should combine your ASB investment with other assets to calculate your wealth zakat.

To make it easier for investors to calculate and pay ASB zakat, ASNB provides zakat calculation and payment facilities through the myASNB portal and app. However, for now, this facility only applies to calculations based on the nisab issued by the Federal Territories Islamic Religious Council (MAIWP).

Zakat and Tax Rebates

We are fortunate in Malaysia because when we pay zakat, we can enjoy the benefit of tax rebates, which means that we can reduce the income tax we owe every time we pay zakat.

However, to claim this rebate, zakat payers must pay zakat in the assessment year and pay it to the authorized religious authorities.

This means you can claim tax rebate for zakat payment made for your ASB investment for the 2023 assessment year, provided you pay zakat before December 31, 2023.

For example, Sarah needs to pay income tax of RM1,000 for the 2022 assessment year, but Sarah paid zakat of RM750 in December 2022 for her ASB investments. Therefore, Sarah only needs to pay income tax of RM250.

Sarah is eligible for a tax rebate of RM750 due to the zakat she paid for her ASB investment.

If zakat is paid in January 2023, rebate claims can be made for the 2023 tax year.

Responsibility to Pay Zakat

So, do not delay in fulfilling the responsibility of paying zakat, as it is obligatory for every eligible Muslim.

By paying zakat, you not only gain blessings for your wealth but can also manage your finances better while contributing to the economic development of the Muslim community in the country.

Additionally, by fulfilling the zakat obligation, you benefit from potential tax deductions that can be reinvested to improve your financial well-being while contributing to the community's welfare.

Ensure that after you have fulfilled your zakat obligation, you keep all of your zakat payment documents, whether receipts or zakat statements.

These documents will be needed if it requested by the Inland Revenue Board (LHDN). The receipts and documents are essential because if they are not available, the zakat contributions you claimed during income tax filings may not be verified.

Remember:

• Ensure zakat payments are made in the current assessment year.

• Pay zakat to recognized religious authorities and keep the payment receipts as proof of payment.