Calculating Zakat on Equity Funds: Moving beyond Proxy Ratios
Zakat is one of the five pillars of Islam and represents a mandatory form of charity that purifies wealth and supports social justice. Every eligible Muslim whose wealth exceeds the ‘Nisab’ threshold must pay a fixed portion, generally 2.5%, of certain types of wealth annually. Zakat applies to assets such as cash savings, gold and silver, trade inventory, investment holdings amongst other assets. The objective of zakat is not only spiritual purification but also the redistribution of wealth to help the poor, needy, and other eligible recipients as defined in the Qur’an.
When it comes to investments, Zakat should ideally be calculated based on the underlying assets of the companies or funds in which one has invested. This means that an investor should examine the company’s balance sheet to determine which portion of the business assets are zakatable, typically cash, receivables, and inventory, while excluding fixed assets such as buildings or machinery that are not subject to zakat. The Zakat for a company may be calculated using the following method:
Net Zakatable assets = Total assets (excluding Tangibles, Intangibles and Prepayments) minus Current liabilities
Some investors use simplified proxy rates like 0.625% or 0.75% of the total market value of their shares; however, these are merely approximations and may not accurately reflect the actual zakatable portion of a company’s assets as there are regional, market and business specific variations. A more precise and Shariah-aligned approach is to base the calculation on the company’s real asset composition.
A distinction is also made between trading shares and long-term investing. If shares are purchased with the intention of short-term trading, they are generally treated like trading inventory, and zakat is calculated at 2.5% of the full market value of the holdings each year. However, if shares are held as long-term investments for dividends or capital appreciation, zakat is typically calculated only on the zakatable underlying assets of the companies rather than on the entire market value of the shares. This approach aligns zakat with the actual nature of the assets owned and ensures that investors fulfil their zakat obligation accurately and fairly.
This year, Simply Ethical have calculated Zakat for equity funds by analysing the underlying holdings of the portfolios rather than relying on commonly used proxy percentages such as 0.625% or 0.75%. By examining the actual asset composition of the companies within these funds, we were able to determine a more accurate zakatable portion of the investments. Our research indicates that for global equity funds, including those managed by HSBC and Schroders, the effective Zakat rate is significantly lower than the standard proxies being used in the industry for many years. Our research shows the calculated Zakat amounts to around 0.32%~ of the investment value for certain (see table below) global equity funds, highlighting how proxy estimates may overstate the actual Zakat obligation when compared with calculations based on underlying assets. We noted that there is regional, market and business specific variations; for instance, many large U.S. technology companies tend to have significantly higher market capitalisations compared with companies in Europe, emerging markets, or Japan. Since higher market capitalisation generally results in lower calculated Zakat percentages (and vice versa), these regional differences can influence the overall outcome of the calculations.
Another important consideration in our research methodology was the adoption of a conservative approach, whereby we incorporated a safety factor or allowance into the final Zakat calculations. This decision was taken for several practical and methodological reasons. First, the financial data used in the analysis contains a time-lag of approximately one to two months. For example, some company data reflected positions as of end-November 2025, while other data was available only up to end-January 2026, whereas our Zakat calculations were completed at the end of February 2026. During this period, market conditions and valuations may have moved considerably, potentially affecting the ratios used in the analysis. A further consideration relates to the complexity of the dataset, which consists of numerous Excel worksheets covering the financial information of hundreds and even thousands of companies, making the dataset potentially susceptible to systematic or human errors. To mitigate these factors’ impact and maintain prudence in fulfilling Zakat obligations, we incorporated a safety margin in the final calculations, ensuring that the resulting figures remain cautious and help investors pay their Zakat more accurately and responsibly.
Here is a reader-friendly table summarising the final zakat rates derived from the research we did for the respective funds:
| Fund Name | Zakat rate (%) on investment value |
| Schroder Islamic Global Equity Fund Z GBP Acc | 0.3188% |
| HSBC Islamic Global Equity Index Fund | 0.3143% |
| HSBC MSCI Europe Islamic ESG UCITS ETF (HIPS) | 0.5624% |
| HSBC MSCI Emerging Markets Islamic ESG UCITS ETF (HIES) | 0.9021% |
| HSBC MSCI Japan Islamic ESG UCITS ETF (HIJS) | 1.3731% |
Note: The Zakat percentages in the above table are derived from an analysis of the underlying holdings and financial data of the companies within each fund, rather than relying on commonly used proxy ratios such as 0.625% or 0.75%. The Zakat percentages presented are derived from an analysis of the underlying holdings and financial data of the companies within each fund and are specific to the period in which the calculations were performed, corresponding to Ramadan 2026. As financial data, company balance sheets, and market valuations change over time, the zakatable portion of these funds may also vary from year to year. Accordingly, these percentage rates should be regarded as time-specific estimates and should not be treated as a fixed or standard rate for future years. Investors are encouraged to review updated calculations or conduct a fresh assessment of the underlying holdings when determining their Zakat obligations in subsequent years.
To ensure the robustness and Shariah compliance of our methodology, we shared and discussed our research with our Sharia adviser, namely, Shariyah Review Bureau (SRB), a respected Sharia advisory firm licensed by the Central Bank of Bahrain. After reviewing our approach and consulting with the Sharia Supervisory Board, the bureau affirmed that the findings of our research are credible and methodologically sound. They stated that if a proper assessment of the underlying holdings of equity funds has been conducted, it is acceptable to rely on the results derived from such analysis rather than defaulting to commonly used proxy ratios such as 0.625% or 0.75%. In their view, investors may proceed with the zakat figures and percentages calculated through their own informed judgement and analysis of the underlying assets. Accordingly, SRB confirmed that the calculated percentages resulting from our research can be used, as they reflect a more precise determination of the zakatable portion of the investments.
In summary, our approach to calculating Zakat on equity investments is built on the principle of accuracy, transparency, and Shariah alignment. Rather than relying on broad proxy ratios, we analysed the underlying assets of the companies held within equity funds to determine the true zakatable portion of those investments. This methodology was further strengthened through consultation with Shariyah Review Bureau (SRB), whose Shari’a scholars affirmed that investors may rely on such detailed analysis instead of standard proxy figures like 0.625% or 0.75%, provided that a proper underlying assessment has been conducted. To enhance prudence, we also incorporated a conservative safety factor to account for data lags, regional market differences, and the potential for minor data errors in large datasets. Taken together, this framework aims to offer investors a more precise, responsible, and Shariah-consistent method of fulfilling their Zakat obligations, ensuring that the duty of giving is carried out with both diligence and confidence.
We at Simply Ethical offer a wide range of investment portfolios designed to meet the needs of varying risk-appetite Shariah-compliant investors. You can explore different investment portfolios here (including Personal Pensions, ISAs, and General Investment Accounts) that best describes your risk/return profile and investment objectives.
To learn more about how we can help you and our investment approach, book a free initial consultation with one of our Financial Advisers.
Disclaimer
This article is for information only. Please do not act based on anything you might read in this article. Past performance is not a reliable indicator of current or future returns. This article contains general information only and does not consider individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it would be unlawful to market such an offer or solicitation.
When you access a shared link of third-party websites, you are leaving our website and assume total responsibility and risk for your use of the third-party websites. We make no representation as to the completeness or accuracy of information provided at these websites nor do we endorse the content and information contained on those sites.