The Holy verse says:
"Fight those who do not believe in Allah or in the Last Day and who do not consider unlawful what Allah and His Messenger have made unlawful and who do not adopt the religion of truth from those who were given the Scripture – [fight] until they give the jizyah willingly while they are humbled." (9:29)
First of all we have to clarify that this verse concerns people of the book (i.e. Christians and Jews).
When was the verse revealed
I will only copy part of the answer of "Dar Al-Iftaa AlMariya - The Egyptian House of Fatwaa (i.e. Islamic Opinion)" on the issue you can enjoy the full article at
(http://www.dar-alifta.org/Foreign/ViewArticle.aspx?ID=208&CategoryID=6) it says:
Regarding the first verse which was mentioned in your question, it was revealed after the battle of Motah and addressed the Romans who mobilized their armies in an attempt to vanquish the Muslims' state after a previous failing attempt conducted by the polytheists.
Therefore, this verse was addressing those who do not keep their covenant or fulfill their vows and the terms "humbleness" that is mentioned in the verse refers to the actual act of giving jizyah after being subjugated to the Muslim state and its general system in exchange of safety, security and protection. This means that the word "humbleness" does not indicate taking the money from them in a humiliating way as this false interpretation goes against the sound understanding of the Quran and the Prophetic traditions regarding the fine treatment of the people of the book and the people of Dhimma in general.
How do Muslims regard Christians and Jews (i.e. people of the book or people of Dhimma)
Before we explain the verse we have to introduce a brief idea about how Muslims regard Christians and Jews. To explain, I will simply narrate a known authentic historical incident that happened and the Holy Quran narrated. When the Persians, who were Magians i.e. believed in an ancient pagan religion, waged war against the Romans, who were Christians, Muslims wanted the Romans to win because they are people of the book and believers in God so they are closer to Muslims from the Persians but the Persians won and then the Muslims were sad for this result. At that time a verse was revealed in the Holy Quran that says: "The Romans have been defeated ) in the neighbouring land;1 but after their defeat they shall gain victory in a few years. All power belongs to Allah both before and after. On that day will the believers rejoice at the victory granted by Allah. He grants victory to whomsoever He pleases. He is the Most Mighty, the Most Compassionate." (4:2-5)
So Muslims wanted the Romans because they were Christians to win. That simply explains how Muslims feel towards people of the book. They are closer to Muslims.
The Holy Quran says: "Allah does not forbid you from those who do not fight you because of religion and do not expel you from your homes – from being righteous toward them and acting justly toward them. Indeed, Allah loves those who act justly." (60:8).
Sufwan ibn Saleem reported: The Messenger of Allah, peace and blessings be upon him, said, "If anyone wrongs a person protected by a covenant, violates his rights, burdens him with more work than he is able to do, or takes something from him without his consent, then I will be his advocate on the Day of Resurrection." (Source: Sunan Abu Dawud 3052)
So the general rule is that Christians and Jews are closer to Muslims and Islam does not order Muslims to go on killing everybody, on the contrary, in Islam you are ORDERED to be good to anyone who do not attack you. So what is the verse (9:29) talking about.
As a general rule whenever Muslims conquers a place on earth, they give the inhabitants three options
1-Embrace Islam (and then you will have to pay the obligatory ZAKAT i.e. obligatory charity)
2- Keep their religion but pay the 'Jizyah'
3- Waging war
First lets understand what the jizyah is.
What is the Jizyah
Jizya is a tax imposed on the Christians and Jews living under the protection of the Islamic state. The Jizya tax guarantees the Christians and Jews complete protection under the Islamic state. If an enemy country attacks the Islamic country, the Islamic country has a duty to defend the Christians and Jews and the Christians and Jews are not even obliged to fight. If they decided to fight with the Muslim country to defend their land then they are exempted from paying the Jizyah.
Conditions to pay Jizyah
Jizyah in other religions
1- Prophet Joshua in the Bible Joshua chapter 16 verse 10 states: " They did not dislodge the Canaanites living in Gezer; to this day the Canaanites live among the people of Ephraim but are required to do forced labor." (New International Version: http://biblehub.com/joshua/16-10.htm)
2- Also in the web site called Theology of work I found this article from which I copied this excerpt:
In Jesus’ days, Jews paid taxes both locally to the Jewish temple and to the pagan government in Rome. Matthew records two separate instances depicting Jesus’ view on paying these taxes. The first incident is recorded inMatthew 17:24-27, where the collectors of the temple tax asked Peter whether Jesus pays that tax. Jesus, knowing of this conversation, asks Peter, “What do you think, Simon? From whom do kings of the earth take toll or tribute? From their children or from others?” Peter answers, “From others.” Jesus responds, “Then the children are free. However, so that we do not give offense to them, go to the sea and cast a hook; take the first fish that comes up; and when you open its mouth, you will find a coin; take that and give it to them for you and me.”
The second incident, concerning the Roman tax, is found in Matthew 22:15-22. Here the Pharisees and Herodians want to entrap Jesus with the question, “Is it lawful to pay taxes to the emperor, or not?” Jesus knows the malice in their hearts and responds with a cutting question, “Why are you putting me to the test, you hypocrites? Show me the coin used for the tax.” When they hand him a denarius, he asks, “Whose head is this, and whose title?” They respond, “The emperor's.” Jesus ends the conversation with the words, “Give therefore to the emperor the things that are the emperor’s, and to God the things that are God’s.”
In another location in the same article it is said: "Paying taxes is one of the bedrock obligations we as citizens or residents undertake for the services we enjoy in any civilized society. "
3- In the New testament Romans 13:6-7 "For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed." So paying taxes according to people of the book themselves is a duty you have to pay, even Jesus, peace and blessings be upon him, paid it. The idea is whether this tax is burdening the payer or not
How much was the 'Jizyah
During the time of prophet Mohammad, peace and blessings be upon him, the value of the jizyah was 1 Dinar per year while during the Umaiid era it reached 4 dinars per year...an amount anyone was capable of paying.
History speaks for itself
1- The Prophet, may Allah bless him, said, "Whoever killed a Mu'ahid (a person who is granted the pledge of protection by the Muslims) shall not smell the fragrance of Paradise though its fragrance can be smelt at a distance of forty years (of traveling)." (Sahih Bukhari, Hadith 2930)
The Prophet, peace and blessings be upon him, said in this regard "whoever hurts a Dhimmi, hurts me".
And also said, "And do not argue with the People of the Scripture except in a way that is best, except for those who commit injustice among them, and say, 'We believe in that which has been revealed to us and revealed to you. And our God and your God is one; and we are Muslims [in submission] to Him." (29:46)
2- Once, during the reign of 'Umar ibn al-Khattab, a Jizyah collector offered the taxes collected from the people to 'Umar, who was upset by the large amount and asked him if he had burdened the people. He replied, "No, not at all! We took only the surplus and lawful taxes." 'Umar asked, "Without any pressure or persecution?" The man replied, "Yes." 'Umar then said to him, "Praise be to Almighty Allah that the non-Muslim citizens have not been oppressed during my rule. (Ibn Salam, Imam Abu 'Ubayd al-Qasim, Al-Amwal, p. 43. Also see Ibn Qudamah, Al Mughni, Volume 9, p. 290 & Ibnul Qayyim, Ahkam Ahlul Dhimma, Volume 1, p.139). Notice that Umar ibn Al-Khattab while he was Caliph tried his best to ensure that those who were paying Jizyah were not doing so under any harsh conditions.
3- The covenant of ‘Umar, may Allah be pleased with him, is a wonderful document showing Islam’s approach to non-Muslims living in peace within Islamic rule. Following is recorded by al-Tabari; “In the name of Allah, the most Gracious, most Beneficent. This is a covenant of peace granted by the slave of Allah, the commander of the faithful ‘Umar to the people of Jerusalem. They are granted protection for their lives, their property, their churches, and their Crosses, in whatever condition they are. All of them are granted the same protection. No one will dwell in their churches, nor will they be destroyed and nothing will be reduced of their belongings. Nothing shall be taken from their Crosses or their property. There will be no compulsion on them regarding their religion, nor will any one of them be troubled.” (Tarikh al-Tabari 2/308)
Also it is recorded in Sahih Bukhari that Umar (after he was stabbed), instructed (his would-be-successor) saying, "I urge him (i.e. the new Caliph) to take care of those non-Muslims who are under the protection of Allah and His Messenger in that he should observe the convention agreed upon with them, and fight on their behalf (to secure their safety) and he should not over-tax them beyond their capability."(Sahih Bukhari, Hadith 2824)
4- It was also reported that Khaled ibn al Walid stated in the contract which he made with some cities near Hira "if we managed to protect you, then we get the jizyah and if we couldn't we don't get it".
5- When Muslims failed to meet the condition of protection of the people of the Dhimma, they returned back the paid jizyah to them and this happened during the reign of Umar ibn al Khattab when he was informed that Heraclius was preparing a huge army to fight against the Muslims. Due to such circumstances, Abu Ubaida, the Muslim military leader at the time, wrote correspondents to all the Muslim rulers of the cities that were opened by Muslims in the Levant area and commanded them to return back the jizyah money that was collected from these cities and he wrote to people of Dhimma saying, "we have returned back your money because we were informed of that a huge army was mobilized by the Romans and you placed a condition on us to protect you and we are unable to do it. So we have paid back your money to keep the condition intact along with the contract that was written between us and you and the contract will resume to be effective should we be granted victory"
6- "The Golden age of Jewish culture" which is defined in wikipedia as " coincided with the Middle Ages in Europe, a period of Muslim rule throughout much of the Iberian Peninsula." as opposed to the term "Spanish Inquisition" which is defined by the Jewish virtual library as:
"The Inquisition was a Roman Catholic tribunal for discovery and punishment of heresy, which was marked by the severity of questioning and punishment and lack of rights afforded to the accused."
Same area same citizens when the land was under Islamic rule it flourished and the Jews themselves call it the golden era of THEIR culture, what more proof is needed that Muslims were not tyrants and YES they applied the verse "There is No compulsion in Religion" (2:256).
Jewish culture considered the Islamic era as their culture's Golden era, no prosecution, no forcing to become Muslims, no expensive back-breaking taxes. This is the complete opposite of what happened to them, in this same area of the world when they were ruled by the others who used religion to justify murder and torture.