FAQ #174: Purification and Zakat on Stocks

Original Question: If I bought a stock and didn’t know if it was Shariah-compliant or not, and sold it after 1 year and 3 months, do I need to purify my returns if there are quarters where the stock was considered non-compliant?

Do I also need to pay zakat on the stock if I didn’t pay zakat for it (assuming it meets the nisab)?

Include a case scenario if compliant or non-compliant for zakat, compliant at start then non-compliant at the end, non-compliant at the start then compliant at the end.

Answer:

The question involves two separate issues:

Purification of returns from Shariah non-compliant stocks
Zakat on stocks, especially if it’s non-compliant.

Do I need to purify my returns if the stock becomes non-compliant?

General principle: If a stock was initially deemed Shariah-compliant but subsequently became non-compliant, contemporary Shariah scholars generally distinguish between:

Capital gains (increase in share price)
Non-permissible income (interest or non-halal revenue)

The principle adopted by many Shariah screening authorities is that an investor should dispose of or purify any impermissible income (both capital gain and dividend) attributable to the period of non-compliance, while the principal investment and capital gains are generally retained, subject to the specific circumstance.

In the case of ignorance (jahl), it may excuse a person from sin where they genuinely did not know and were not negligent in discovering the ruling. However, once the non-compliant status becomes known, the obligation changes. The investor should take reasonable steps to rectify the situation by purifying any impermissible income, exiting the non-compliant investment within a reasonable period, and exercising due diligence in future investments. Islam distinguishes between excusing past ignorance and permitting continued involvement after knowledge has been established.

The Shariah Advisory Council (SAC) of the Securities Commissions (SC) further elaborated on the disposal, especially if it is below the original cost: “any excess capital gain derived from market price higher than the closing price on the announcement day should be donated to charitable bodies.

Nonetheless, investors are allowed to hold their investment in the Shariah non-compliant securities if the market price of the said securities is below the original investment costs. It is also permissible to keep the dividends received during the holding period. Once the total amount of dividends received and the market value of the Shariah non-compliant securities is equal to the original investment costs, investors are advised to dispose of their holdings.”

Zakat on stocks

The fact that a stock is Shariah non-compliant does not automatically exempt it from zakat. Zakat is still due on stocks if it met with all its requirements: wealth that is owned, reaches nisab at the end of haul and completes one haul. Scholars generally distinguish between the sinfulness of owning a non-compliant asset and the obligation of zakat. Zakat is primarily attached to ownership of wealth, not the permissibility of the asset itself.

According to the zakat methodology commonly adopted in Singapore and Malaysia, investments such as stocks, shares, ETFs, REITs, and unit trusts are assessed based on their market value at the end of the haul. If the total value of your investments exceeds the nisab threshold, zakat is payable at 2.5%. Dividends that have been received and retained may also be included in the zakat calculation. See here for MUIS guidance on zakat on shares: https://www.zakat.sg/types-of-zakat/zakat-on-shares/

A more difficult question is whether zakat is due when the underlying stock is non-compliant. Contemporary scholars generally separate the two issues:

The obligation of zakat, which arises from ownership of wealth
The obligation to purify impermissible income and exit non-compliant activities.

If one owns a stock that is non-compliant, but has reached the nisab threshold and remains in the ownership for one haul, then zakat is due. This is due to the fact that wealth is still owned and has economic value. Any impermissible income should be purified separately and should not be counted as part of one’s zakatable wealth.

> The scenarios below would bring more clarity to both the answer:

Scenario A: Compliant at purchase > became non-compliant during holding period > sold after 15 months

Example:

Ali bought Stock A when it was Shariah-compliant. After 8 months, the company failed the Shariah screening, but he held it for another 7 months and then sold the stock.

In this case, most contemporary scholars do not require to dispose of the entire capital gain. However, any non-permissible income generated during the period of non-compliance (in this case, after 8 months of holding) should be purified according to the relevant purification ratio published by the screening authority. Ideally, the investor should frequently check on their portfolios, and when the announcement of non-compliance was made, he should dispose of the stock within a reasonable period. This approach is adopted by SAC SC.

If one genuinely did not know the company’s change in shariah status and was not negligent in monitoring reasonably available screening updates, then he is generally not sinful for the past period. However, once the change becomes known, he should promptly dispose of the shares within a reasonable period, purify any impermissible income, and avoid continuing to benefit from a non-compliant investment.

The reasonable steps are as follows: identify quarters where the company was classified non-compliant by a reputable Shariah screening body. For those periods. Estimate the portion of the total profit (capital gains + dividends) that is likely linked to haram activities or riba. Many scholars allow a reasonable estimate when precise calculations are not practical. Then give that estimated portion to charity, without expecting reward for that amount.

Zakat remains payable because you owned a valuable asset throughout the haul period. In addition, any non-permissible income attributable to the non-compliant period should be purified. The investor should generally dispose of the stock within a reasonable period after becoming aware of the change in status, in line with the guidance of the Securities Commission Malaysia regarding reclassified securities.

Scenario B: Non-compliant stock at purchase > later become compliant

Example:

Ali bought a stock while unaware it was non-compliant. After one year, the company restructured and became Shariah-compliant.

In this scenario, the original investment was made in a non-compliant asset. Scholars generally advise purifying any impermissible income earned during the non-compliant period. Repentance is sufficient for an unintentional purchase and future ownership is permissible once the company satisfies Shariah requirements.

Zakat remains payable if nisab and haul conditions are met. Impermissible income received during the non-compliant period should be purified, while ownership after the company becomes compliant is generally permissible.

Scenario C: Non-compliant through holding period.

Example:

Ali bought a share for a conventional bank and held it for 15 months. He later sold it for a profit.

The underlying investment asset is non-compliant from the start. Dividends derived from impermissible activities should be purified. However, scholars differ regarding capital gains: some allow retention of capital gains while requiring purification of impermissible income only, while others advocate a stricter approach, especially where the company’s primary business is haram.

Zakat is still generally payable because the shares constitute owned wealth. However, any impermissible dividends or income should be purified separately, and the investor should exit the investment upon discovering its non-compliant status.

Purification alone does not make it permissible to continue knowingly holding an investment whose primary business or activities remain non-compliant. While purification addresses impermissible income already received, it does not legitimise the continued generation of impermissible returns. Accordingly, once an investor becomes aware that an investment is non-compliant, he should exit the investment within a reasonable period and purify the impermissible income, unless there is a genuine necessity or legal impediment preventing immediate disposal.

Conclusion

Answering the above question, IFSG is of the view that if a stock becomes non-compliant during the holding period, an investor should generally purify any impermissible income attributable to the non-compliant period and dispose of the stock within a reasonable time after being aware of the change. The exact purification amount depends on the methodology of the relevant shariah screening authority.

The compliance status affects purification, but does not conceal zakat. If the stock meets the condition of the nisab and haul, zakat should generally be paid on it. At the same time, when a stock becomes non-compliant, one is required to exit as soon as reasonably possible, pay zakat on its market value while it is still in your possession, until you dispose of them, and purify non-compliant gains. The zakat required to pay is on the market value of the shares at your zakat date if your total zakatable wealth reaches nisab, even if you did not pay for it previously.

As Muslims, we are encouraged to exercise due diligence before and during our investments. This includes periodically reviewing the Shariah status of our holdings through reputable screening authorities. While genuine ignorance may excuse past actions, it does not justify continuing a non-compliant investment after becoming aware of its status. Purification is intended to cleanse impermissible income already received, whereas repentance and timely divestment demonstrate one’s commitment to avoid future non-halal earnings.

And Allah knows best.

Click here for further details on zakat: https://islamicfinance.sg/summary-class-4/

And here for Shariah-compliant stock investment guide: https://islamicfinance.sg/shariah-compliant-stock-investment-guide/

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