How is zakat deducted on dividends?

Every time a stockholder receives a dividend, he has to pay the required tax and zakat. While dividend tax is usually quite straightforward, the amount of zakat deducted confuses a lot of people.

Complaints like ‘they deducted 50% zakat on my dividend‘ and ‘why is the zakat deducted not 2.5%‘ are too common in PSX.

Today we will look at how the zakat is calculated and hopefully, this will remove all the confusion.

Zakat Calaulation in PSX

In the PSX, you pay zakat on the amount of shares you hold.

The formula for zakat is as follows:

Zakat = number of shares x share face value x 2.5 / 100

The number of shares is the total quantity of stock on which you received the dividends.

The share face value is normally 10, but you can see the exact face value of your share on our PSX listed companies page.

And finally, the 2.5/100 part shows that the percentage of zakat to deduct is 2.5%.

Example

Let’s understand the above process with an example.

Let’s say you hold 2000 shares of DCR and DCR announced Rs. 0.5 dividend. The gross dividend you should receive is Rs. 1000.

The total zakat deducted on it, as per the above-mentioned formula, should be:

2000 x 10 x 2.5 / 100

This comes down to Rs. 500. So Rs. 500 will be deducted.

This means you have paid half of your dividend in Zakat.

So while the zakat is indeed deducted at the rate of 2.5%, the total deduction according to the dividend amount received is actually 50% of the dividend, which may not be feasible for you.

This is how the PSX calculates zakat. Fortunately, if you do not agree with this calculation, you can avoid paying zakat in PSX in future.