Zakat is commonly referred to as either a tax or as charity. Neither of these is accurate as Zakat is a divine duty. Zakat is considered a right of the poor over the rich. Withholding it is tantamount to depriving the poor of their God-given right.
Allah (SWT) says of the wealthy in the Qur'an;
'In their wealth there is a known share for the beggars and the destitute' (70:24-25)
'Take alms from their property that you may purify and sanctify them and pray for them. Verily your prayers are a comfort for them' (9:103)
Definition of Nisab
The Nisab is the minimum amount of wealth upon which Zakat is payable. It represents the guaranteed minimum financial floor above which an individual is deemed to be 'Sahib-un-Nisab' (owner of wealth) and therefore liable to Zakat.
The Nisab limit was set by the Prophet (peace be upon him) at 20 Mithqaal of gold or 200 dirhams of silver. These measures are equivalent to 87.48 grams of Gold and 612.36 grams of Silver respectively. If a person only has Gold as an asset, then the Nisab measure for Gold must be used. If however the person has a mixture of assets, then the Nisab level for Silver should be used. To ascertain the current monetary equivalent of the Nisab limit, it is necessary to establish the market rate for a gram of Gold & Silver. This can be obtained from http://www.kitco.com/. The market rate (July 2009) for a gram of 24 carat Gold was £20.37, and £0.29 for a gram of Silver. Therefore, the Nisab threshold for Gold is approximately £1781.96 and for Silver it is £177.58. A person will only pay Zakat if his Zakatable assets, after adding and subtracting debts owed either to or from others, is equal to, or in excess of £177.58.
Zakat is payable at a rate of 2.5% on all assets including those within the Nisab threshold.
Zaid has valued his Zakatable assets at £5,000 on his Zakat anniversary. He owes £4,900 to his brother and has no money owing to him. His Zakatable assets are therefore £5,000 - £4,900 = £100, which is below the Nisab threshold. Zaid is therefore not liable to pay Zakat.
Zahida has valued her Zakatable assets at £3,000 on her Zakat anniversary. Zahida owes £1,000 to various people. Zahida is also owed £3,000 by a friend. Her Zakatable assets are therefore £3,000 - £1,000 + £3,000 = £5,000. This makes her Zakat liability 2.5% of £5,000 = £125.
Source: 1st Ethical Charitable Trust