[Q 512] Zakat Ruling for Retirement Funds

QUESTION:

Do you have to pay zakat on money in a retirement account with company that just sits there and grows and money gets added to it as well by company?

The rule for this accounts is that you must keep the money in account until age 59. But You can take money out earlier, but if you do, you’ll have to pay penalties and taxes on the amount you withdraw.

ANSWER:

From the company’s side, a fixed amount is deducted every month from the employee’s salary, and an equal amount is added by the institution from its own side. Both of these amounts are deposited in the bank, and whatever profit is earned on it is also given to the employee. After this clarification, the ruling is as follows:

The original amount deducted from the employee’s salary, as well as the equal amount added by the institution against that deduction, both types of amounts are the employee’s own property and are lawful (Halal – permissible) for him. It is not the case that this is some foreign or unrelated money; rather, under a system it has been set aside separately, but in any case, this wealth belongs to the employee himself and is counted in his account. Whether to take interest or not, the relevant forms, etc., are filled out by the employee himself. Therefore, if the conditions of Zakat are fulfilled, Zakat (Zakat – obligatory almsgiving) will also be obligatory on this amount, and in other matters as well, this status of ownership must be kept in view.

However, there is a concession regarding Zakat: until this amount is fully received, or at least received to the extent of one-fifth of the Nisab, payment of Zakat is not obligatory. But when it is received, Zakat for all the previous years will have to be paid. Therefore, it is better that if a person already has other wealth on which Zakat is Fard (obligatory), he should continue paying Zakat every year on the amount that keeps accumulating in the GP Fund (Provident Fund), so that there is no difficulty later in paying a large amount all at once.

As for the interest-based increase, there is no Zakat on it, because Zakat is only due on pure (lawful) wealth.

It should be clearly understood that the profit given on this amount by placing it in a bank, etc., on behalf of the institution, is interest (Riba – usury), because depositing money in a bank is considered a loan, and any profit received on a loan is interest. Therefore, the ruling regarding this interest amount is that when the employee receives the total amount, the interest portion should be given to a Shar‘i Faqir (Shar‘i Faqir – legally eligible poor person) without the intention of reward. And if the company or institution provides the option that you may state that no interest should be added to your amount, then it will be necessary to choose that option.

Answered by: Usman Madani (Ask Mufti scholar)
Translated answer
Date: 23rd January 2026