Do You Pay Zakat on Borrowed Money?
Zakat is paid by a Sahib e Nisab under Islamic principles @ 2.50% per annum on his savings in monetary terms, gold and silver, and tradeable goods according to the set principles of Islam. Zakat is actually reffered to as arms to the poor and needy or charity. Generally it is a small percentage but All says,the example of those who spend in the good cause of Allah is like the example of the seed.
The question that always arises in everyone’s mind is Zakat Donations applicable to money that they have loaned out or borrowed? No, As far as money is lent or borrowed or anything lent, whether it is gold given on loan or silver, cash or currency, the person who owns that he has to pay Zakat on it. The person who owns that borrowed money has to pay it, but the person who uses it he does not have to pay Zakat.
Zakat is Obligated on what peoples?
Zakat is to take the wealth from the rich people and pass it along to those that happen to be in need. Zakat is obligatory upon the individual who fulfils five conditions:
- You must be a Muslim
- A person who is free and have a right to his own wealth
- You must be mature
- One must be in possession of Nisab
When the individual gives Zakat, the recipient does not need to know that this is Zakat. However, it is an obligation on the giver to ensure that the recipient can receive Zakat.
Zakat On Borrowed money
If you borrowed money, most likely if you borrow the money you feel you do not possess it anymore but let assume that you borrowed 10,000 Euros from a cousin and you have that money in your bank account for a whole year so if you did not give it back then you have to pay Zakat on it. You are obliged to give 2.5% Zakat on it. When Prophet dispatched his men to collect the Zakat from all over the tribes, the zakat collectors would see a herd of sheep and tell them that you have to give ten sheep as a Zakat. The zakat collectors do not ask and inquire this all yours or borrow some of it, which means that they take Zakat whatever is in your possession.
If the money is given to someone as a business deal saying that we share the profit it is your money, yet you have to pay the Zakat.
If you give a loan to any relative or friend without any bribe for the sake of Allah, it will be a secured loan if the person is rich and return it to you, on that you have to pay Zakat every year. You have to pay every year the Zakat on that amount.
The other type of loan is an unsecured loan; for example, the person you have given to us may be inadequate, and you have doubts that he will be able to repay the money or not. If you don’t want to pay for an unsecured loan, you need not spend every year. If you do not get the cash back you do not have to pay Zakat on it, But if you get it, then maybe after five years, you have to pay for all the years you had lent.
In a nutshell, if you borrowed money, you have to give Zakat as long as the full lunar year had passed and it reached a threshold, so you have to give it.