Calculate the purification due on your dividends

What is dividend purification?

Purification — tathir in Arabic — means giving away each year the share of an investment's income that comes from a non-compliant source. It concerns companies that pass the compliance screens while retaining a small residual exposure: interest earned on their cash, a non-compliant side activity. The AAOIFI standards tolerate such income as long as it stays below 5% of the total, on condition that it is purified.

Purification does not make a non-compliant company compliant: a company ruled out by the sector screen does not become holdable because a share of it is given away. It only corrects what remains below the threshold. We set out these screens in our guide to checking whether a share is halal.

How does the calculation work?

The reasoning is proportional. If an identified share of the company's income comes from a non-compliant source, the same share of the dividend you received is regarded as not rightfully earned, and is given away. This is the rule described by Mufti Taqi Usmani in his criteria for investing in shares: the proportion of non-compliant income within the dividend paid must be given in charity.

Example: you received 200 CHF in dividends from a company 3% of whose income comes from interest. The year's purification is 200 × 3% = 6 CHF. The calculator performs the same operation for each holding, then adds them up.

• Dividends received — the gross amount paid over the year, before withholding taxes. This is the income actually attributed to the security.
• Share of non-compliant income — as a percentage of the company's total income, read in its accounts or published by the fund manager.
• Amount to purify — the product of the two, holding by holding.

Where do you find the share of non-compliant income?

For a share held directly, it is read in the annual report: in the income statement, interest income and income from non-compliant activities, divided by total income. It is the third ratio of AAOIFI screening, the one that must stay below 5%. The same figure therefore serves twice: to check compliance, then to calculate purification.

For a screened ETF or fund, many managers publish a dividend purification ratio each year, or the index provider calculates it. Failing that, use a cautious average of the securities held. Our guide to halal ETFs explains where to look for this information.

Should capital gains be purified too?

Opinions differ. Mufti Taqi Usmani reports two positions: one holds that no purification is due on the capital gain realised when a share is sold, the other requires it to be purified in the same proportion. He considers the first defensible, but regards the second as more cautious and further removed from doubt; for a portfolio of securities, he accepts applying an average percentage. His criteria are reproduced on IslamicMarkets.

The calculator therefore leaves the choice to you: capital gains are excluded by default, and you can include them by entering the amount realised over the year and the average non-compliant share of your portfolio. If you leave that rate blank, it uses the weighted average of your holdings.

Who to give to, and how?

The purified amount is given to charitable causes, without expecting any reward: it never belonged to you. It counts neither as personal charity nor as zakat. Several references recommend drawing no benefit from it, including a tax benefit; that is a point to settle with your religious authority.

A fixed date makes everything simpler. The most practical approach is to do the calculation once a year, when you gather your statements for your tax return: the dividends received already appear there, and the tax value of securities at 31 December is also used for the zakat calculation.

Purification and zakat: what is the difference?

They are two distinct obligations, which do not offset each other. Purification bears on income, and removes the non-compliant share from it. Zakat bears on wealth that reaches the nisab and has been held for a lunar year, at a rate of 2.5%. The same portfolio therefore calls for both calculations, every year, separately.

Frequently asked questions

How do you calculate the purification of a dividend?

You multiply the dividend received by the share of the company's income that comes from non-compliant sources. For 200 CHF of dividends and 3% non-compliant income, the purification is 6 CHF.

Does a halal ETF need to be purified?

Yes, generally. A screened ETF holds companies below the tolerance thresholds, not at zero. Many managers publish a dividend purification ratio each year, to be applied to dividends received or reinvested.

Does purification apply if the fund pays no dividend?

An accumulating fund reinvests dividends instead of paying them out. The non-compliant share exists all the same: it is calculated on the reinvested dividends, which the manager states in its annual report.

Can purification replace zakat?

No. Purification removes from an income what should never have entered it; zakat is an annual levy on wealth. The two are calculated and paid separately.