As you are all aware that Ramadan is around the corner, banking consumers should know that Zakat deduction from bank accounts takes place on the 1st of every Ramadan. For those who allow their banks to conduct Zakat deduction on their behalf need not worry. However, most consumers choose to give Zakat on their own terms. For this purpose, we, at MyBankersOnline, are providing guidance on how Zakat deduction takes place and are listing steps to avoid Zakat deduction from your bank accounts.
Firstly, Zakat is only applicable on savings and investment accounts. Standard current accounts and basic banking accounts (BBA) are exempted from Zakat deduction. Since the Islamic concept of alms giving focuses on a person wealth and savings, only savings accounts, term deposits and investment accounts are applicable for Zakat deduction. Although the government has yet to declare the account balance threshold for Zakat deduction, last year the amount was Rs. 41,872. All savings accounts and term deposits maintaining balances less than this amount are exempted from Zakat deduction by banks. The applicable Zakat rate on an individual’s wealth is 2.5% of the total value. Banks use this value to calculate the applicable Zakat amount on each individual’s savings and deduct the respective amounts on the 1st of every Ramadan.
For individuals choosing to pay Zakat on their own, there are certain steps that can be followed to prevent their banking institution from making Zakat deduction from their accounts. At this point, MyBankersOnline would like to specify that these are not methods to avoid alms giving. Zakat is applicable on every able Muslim. We are providing guidance to those who have resolved to pay Zakat through sources other than the banking institutions.
- Most consumers submit a Zakat Declaration form against profit-bearing accounts to prevent Zakat deduction. Commonly known as a CZ-50 document, such a declaration prevents the banks from deducting the applicable Zakat amounts from the respective individuals’ holdings. The final submission date for CZ-50 forms is the 1st of Sha’baan. A CZ-50 form does not need to be submitted every year. Once in place, the declaration is applicable on every Zakat deduction cycle. CZ-50 forms are the only method to prevent Zakat deduction from fixed deposits and investments since such products are less liquid than savings accounts.
- For consumers who wish to pay Zakat on their own accord, and are unable to submit CZ-50 forms to their respective banks, they can shift their savings to current accounts for a few days. Since current accounts are exempted from Zakat deduction, if individuals shift their savings to current accounts, the bank will not deduct the applicable Zakat amount on their holdings. Post 1st Ramadan, the amounts can be shifted back to savings accounts.
- For consumers, who are not maintaining current accounts, payment orders (PO) can be issued against savings account holdings to reduce the balances below the applicable threshold for Zakat deduction. These payment orders can be drawn in favor of the respective individuals to ease the process of depositing back into the accounts post 1st Ramadan.
- There are some consumers who choose to empty their bank balances before the start of Ramadan to prevent Zakat deduction. The balances are converted to hard cash and stored in lockers or in the safety of their individual homes. Although this is an alternative to prevent Zakat deduction by banks, the physical holding of large amounts of cash is not advisable.
Although the amounts collected from Zakat deduction by the banking institutions are deposited in our government’s Zakat fund and further passed on for the welfare of the lower strata of society, some consumers choose to conduct this activity on their own accord. If you have planned to pay Zakat on your own terms this year, we have listed a few techniques to assist you in preventing the banks and financial institutions from deducting the applicable amounts from your holdings. However, it is to be noted alms giving is an important foundation in Islam. Mere prevention of Zakat deduction does not exempt an individual from paying his dues to the welfare of the society.