Answer
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
1- Haram (illegal) income should be fully returned back to its owners if possible or distributed to recipients like those of Zakah if it’s not possible.
2- Zakah is due on the asset not on the income.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
Zakah is due on the asset not on the income. So, if you have an asset (whether mutual fund or a property bought on interest), the asset is subject to Zakah (unless it is exempt because it is for personal use for the house).
Haram income should all be distributed to recipients like those of Zakah.
What is more important in your question is the mix up between haram and others. Many mutual funds are not haram even some that may have some haram income only the part of income that is haram should be given to charity not kept, and a property financed on interest its income (say rent) is not haram.
Almighty Allah knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.