Clarification on Exempting a Debtor from Khums

November 22, 2020

Clarification on Exempting a Debtor from Khums
According to the Edicts of His Eminence al-Sayyid al-Sistani (may God prolong his life)

إيضاحٌ وتنبيهٌ حولَ مسألةِ إعفاءِ الْمَدينِ مِنَ الخُمْس

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In the Name of God, the Most Beneficent, the Most Merciful

We have received many questions regarding ruling no. 1231 from the book Minhaj al-Salihin and the new details mentioned in its footnote regarding the possibility of being exempt from khums due to specific types of debt and whether this ruling applies to mortgages.

It is vital that we clarify the following terminology before explaining the ruling.

• Living expenses: All yearly expenses that cover a person’s needs and the needs of their dependents (e.g., shelter, food, and clothing) and are appropriate for their shan[1] or standard of living, which varies based on time, place, situation, and circumstances.
• Continuous living expenses: Every expense that covers a person’s needs and the needs of their dependents on a continuous basis, such as a home, car, furniture, and other such necessities. These expenses do not include anything spent for once or temporarily such as the following:
• marriage expenses
• education expenses
• medical expenses for a temporary illness
• Khums (fifth): A yearly financial obligation that requires payment of twenty percent of the total profits, benefits received, and returns, after deducting living expenses.
• Debt: Money that someone owes to another person or an entity like a bank due to the purchase of something (e.g., real-estate or a car) using a debt instrument, credit, or from taking a monetary loan.[2] However, it is not permissible to take a loan or buy on credit if doing so involves usury or interest, even if it is taken from a non-Muslim entity, except by considering it istinqadh (see paragraph below).[3]

The previous ruling

The monetary credit a person receives is generally excluded from their yearly profit if they use it for their expenses that are appropriate for their shan during that year. Therefore, the amount of accrued profit [in that year] that is equivalent to a person’s debt is exempt from khums. For example, if a person borrows $100,000 to purchase a home to live in, and in that same year they earn $100,000 in profit, then they are not required to pay khums on that profit. However, if they made a profit of $70,000 in the first year and paid it towards their debt, then in the second year the remainder of the debt (i.e., $30,000) is not exempt from khums because it is not [considered] an expense for the second year, only the first year (i.e., the year of purchase). In other words, the debt a person incurs in a given year to cover the expense of that same year is not exempt from khums in the succeeding years.

The updated ruling

The new ruling states that if a person borrows money to purchase something which is considered a continuous expense (e.g., home, car), His Eminence al-Sayyid al-Sistani permits them to also exclude the equivalent amount of [outstanding] debt from any profit in succeeding years (i.e., after the year of purchase) as long as they continue to use the purchased item. Thus, going back to the aforementioned example, if a person borrows $100,000 to purchase a home and pays off $70,000 in the first year, then based on this updated ruling, they may exclude $30,000 from any profit in the second year, and from any profits in succeeding years for the amount of outstanding debt as long as the person continues to use the purchased item. Note that khums would still need to be determined and paid for any profits that surpass the amount that is equivalent to the outstanding debt.

Important points that are often ignored

• The above exemption does not apply to debt incurred for trade and investment purposes, marriage, study, travel, or treatment for a temporary illness, or if the expenditure was damaged or stolen. Instead, this exemption is only for necessary living expenses that are continuous and permanent like housing, clothing, food, drink, treatment for chronic illnesses and other such necessities if they are not beyond what is appropriate for a person’s shan. For example, common view or urf would not consider a ten-bedroom home as appropriate for a household of two, making it beyond their status.
• The debt decreases annually due to paid installments over time. Therefore, the amount exempted is the remainder of the debt, not the entire debt, and this is the case for the subsequent years.

Example: A person borrows $10,000 to buy a car, and the sum of installments paid in the first year is $1,000. If they also profit $10,000 in that year, then only $9,000 will be exempt from khums because that is the amount that is equivalent to the remaining debt. Therefore, khums would be due on $1,000 (i.e., 20% of $1,000 = $200). If the same person profits $10,000 in the next year and again pays $1,000 in installments for that second year, the remaining debt would be $8,000. Therefore, they would be responsible for paying khums on $2,000 (i.e., $400), and so on.

• It is important to note that this ruling applies to debt that meets the religious criteria and not necessarily every type of credit taken by a person that might be defined as a debt, like a mortgage for example. His Eminence al-Sayyid al-Sistani has answered a question about mortgage in which he said, “It is permissible to take money from a non-Islamic bank with the intention of istinqadh but not a loan, regardless of whether it is financed by a government or a private entity. Moreover, the understanding that one will sooner or later be [legally and contractually] obliged to pay back not only the principal, but the interest as well, does not affect the permissibility [of such a transaction].”[4] Formulation of the intention for taking the money (i.e., istinqadh or loan) rests upon the individual. So, if the person considers the mortgage to be a loan, then its amount is exempt from khums (as described above). However, they would be considered sinful for initiating and participating in an interest-bearing loan transaction. On the other hand, if they take the mortgage with the intention of istinqadh, then they are not considered sinful. However, the money would be considered revenue and not exempt when it comes to determining khums based on this new ruling.
• If a person takes money from a bank with the intention of istinqadh and as a result they have enough [surplus] money to cover the cost of pilgrimage (hajj), then hajj becomes obligatory for them.[5] In contrast, if the money was taken with the intention of it being a loan and they had enough [thereafter] to cover the cost of hajj, it would not be obligatory in that case because the money is a loan (i.e., the person would be in debt).[6]

Another examples

A person borrows $100,000 (i.e., takes money with the intention of loan) to buy a house to live in and pays the bank $10,000 in total installments annually. Based on this, the amount of yearly profit that is exempt from khums based on their outstanding debt is as follows:

The first year in which the person incurs the debt

-100,000	Bank loan
+20,000	Profit
-80,000
+10,000	The sum of installment payments[7] made towards the principal in the first year
-70,000	The remaining debt carried over from the first year to the second year
+25,000	Second year’s profit
-45,000
+10,000	The sum of the installment payments made towards the principal in the second year
-35,000	The remaining debt carried over from the second year to the third year
+15,000	Third year’s profit
-20,000
+10,000	The sum of the installment payments made towards the principal in the third year
-10,000	The remaining debt carried over from the third year to the fourth year
+20,000	Fourth year’s profit
+10,000	The entire debt is repaid, its exemption from khums is complete, and an amount remains from the fourth year’s profits
-20%	Remainder of profit that is subject to khums
2,000	Total khums due

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[1] Shan—an Islamic jurisprudential term. It is the status of a person based on their standard of living, which is characterized by common understanding or urf and assumes a level of spending according to their means that is neither miserly nor extravagant (i.e., excessive). Shan can differ from one community, country, or time to another. Moreover, what might be considered an appropriate expenditure or amenity for a person of a certain shan (i.e., based on their earnings and standard of living) may not be appropriate for another. Hence, expenses for needs, and therefore khums, are determined accordingly.

[2] It is obligatory to repay the debt according to the terms of the transaction and the agreement between the lender and borrower, and it is not permissible to violate it. Moreover, it is obligatory to abide by the laws of the land in which a person lives.

[3] Istinqadh is a jurisprudential term that means taking money from a non-Muslim entity, such as a bank; it is permissible.

[4]  Sayyid Ali al-Sistani, Code of Practice for Muslims in the West.

[5] Sayyid Alial-Sistani, Manasik al-hajj wa mulhaqatiha, p. 29, no. 33–34 (Stamped and signed with the seal and signature of his eminence dated Shawwal 19, 1428 A.H.).

[6] Sayyid Alial-Sistani, Manasik al-hajj wa mulhaqatiha, p. 29, no. 33–34 (Stamped and signed with the seal and signature of his eminence dated Shawwal 19, 1428 A.H.).

[7] The sum of installment payments only includes the amount paid towards the principal and not any interest, insurance, or other charges.