Short answer
Yes, in the Hanafi school. Debts you owe that are due now are subtracted from your zakatable wealth before you check the nisab. For long-term debts like a mortgage or student loan, many Hanafi scholars today subtract only the payments due in the coming year, not the whole balance. In the Shafi'i school debts do not reduce zakat.
A debt owed to people that is payable now reduces zakatable wealth; if what remains is below the nisab, no zakat is due. For long-term loans paid in instalments, many contemporary Hanafi scholars allow only the instalments due within the next twelve months to be deducted.
Other madhhabs
- Shafi'i
- Debt does not reduce zakat: you pay on everything you hold, and settle your debts separately.
- Maliki
- Debts reduce zakat on gold, silver and cash, but not on crops or livestock.
Explanation
Zakat is taken from the rich, and someone whose debts eat up his savings is not rich in that sense. That is why, in the Hanafi school, you subtract what you owe before checking the nisab. Uthman, as caliph, told people in the zakat month to pay off their debts first and then pay zakat on what remained.
What you can subtract on your zakat date:
- Credit card balances and bills that are due.
- Wages you owe to workers, and rent that is due.
- Personal loans or money borrowed from family that is payable now.
- For a mortgage, car finance or student loan: the instalments due in the coming year, in the view many Hanafi scholars follow today, not the whole remaining balance.
Future bills that are not yet due, like next month's rent, are not subtracted.
The reason for the long-term debt rule is practical. Most people today carry a large mortgage or student loan for decades. If the whole balance were subtracted, almost nobody with a home loan would pay zakat, even with large savings. Limiting the deduction to what is actually payable in the year keeps the rule fair to the poor.
Debt does not excuse zakat that has already fallen due, and zakat is no reason to delay paying a debt. For money others owe you, see zakat on money owed to you.
The evidence
Quran, Surah At-Tawba 9:60
۞ إِنَّمَا ٱلصَّدَقَٰتُ لِلْفُقَرَآءِ وَٱلْمَسَٰكِينِ وَٱلْعَٰمِلِينَ عَلَيْهَا وَٱلْمُؤَلَّفَةِ قُلُوبُهُمْ وَفِى ٱلرِّقَابِ وَٱلْغَٰرِمِينَ وَفِى سَبِيلِ ٱللَّهِ وَٱبْنِ ٱلسَّبِيلِ ۖ فَرِيضَةًۭ مِّنَ ٱللَّهِ ۗ وَٱللَّهُ عَلِيمٌ حَكِيمٌۭ ﴿٦٠﴾
Zakah expenditures are only for the poor and for the needy and for those employed to collect [zakah] and for bringing hearts together [for Islam] and for freeing captives [or slaves] and for those in debt and for the cause of Allah and for the [stranded] traveler - an obligation [imposed] by Allah. And Allah is Knowing and Wise.
People weighed down by debt are counted among those who receive zakat, not those who owe it.
Muwatta Malik 593
Graded in the Muwatta... هذا شهر زكاتكم فمن كان عليه دين فليؤد دينه ...
"This is the month of your zakat. Whoever owes a debt, let him pay it off, so that your wealth is clear and you can pay zakat from it."
Uthman's instruction, given publicly with the Companions present, that debts are settled before zakat is worked out.
Where the ruling is recorded
- al-Hidaya, Kitab al-Zakat, opening section on debt preventing zakat. A debt owed to people that covers the wealth prevents zakat.
- Fiqhi Maqalat, Mufti Taqi Usmani's paper on zakat and long-term loans. Only the instalments currently payable are deducted from zakatable wealth.
- al-Majmu', Kitab al-Zakat, on whether debt prevents zakat. The Shafi'i position that it does not.
This answer is pending review by the scholars on our team. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.