A Debt is defined as an amount of money owed by someone to another.
Zakat on Creditor (Lender)
a) Debt is countable for Zakat on the lender in case it is considered recoverable from the borrower.
b) If debt is considered irrecoverable or doubtful is not countable for Zakat. Once this debt is recovered from the borrower, Zakat is payable on it for one year only by the lender, no matter how many years it has been owed by the borrower.
Zakat on Debtor(Borrower)
a) The amount of debt owed by the payer of Zakat is to be excluded from the portion liable to Zakat, provided that he remains in debt before Zakat falls due and finds no other property in fixed assets not liable to Zakat (such as Real Estates like Land, Building, Apartments, Machines, Equipments, Transport Means, Cars, Furniture etc.) that exceeds his basic needs to repay his debt therefrom.
b) A payer of Zakat who has more than one type of property counted for Zakat may specify a certain type of these properties to repay his debt therefrom and dedicate the rest, which should be more beneficial to the poor, to Zakat.
c) In long term, instalment debts, like housing instalments, and other debts that finance fixed assets, which are not counted for Zakat, the payer deducts the amount of annual instalment all at a time, then calculates the total sum of the remaining property and pays Zakat on it if it reaches the Nisab of Zakat.
d) Loans that are invested to finance any commercial business are to be deducted from the total sum liable to Zakat, in case the payer does not have fixed assets exceeding his basic needs.
e) Loans invested to finance industrial projects are to be deducted from the total sum of properties counted for Zakat, in case the debtor has no fixed assets exceeding his basic needs to cover these loans. However, in case there are fixed assets to cover these loans, they will not be deducted from the total sum of the properties counted for Zakat.
f) In case the amount of these fixed assets falls short from covering the whole amount of loans, the remaining uncovered portion is to be deducted from the total sum counted for Zakat. In case of deferred investment loans, only the amount of the annual installment, which falls due, is deducted.
(Please read the Fatwas delivered by the Islamic Conferences & Seminars.)