Israel Limits Capital Gains Tax Exemption on Investment Savings to 200,000 Shekels

Israel's Ministry of Finance is finalizing a major savings reform that will cap the total capital gains tax exemption across all investment savings products at 200,000 shekels. This new ceiling will apply collectively to provident funds for investment, savings policies, and mutual funds, which will be consolidated under a unified account. Currently, savers in provident funds for investment enjoy a full capital gains tax exemption when withdrawing funds as a pension after age 60. Under the new model, the total tax benefit allocated by the state remains unchanged but will be divided among many more savers and across three different investment products.

The reform aims to reduce regulatory arbitrage by equalizing tax conditions across various financial products, encouraging the public to move money from checking accounts to interest-bearing financial instruments. Consolidating these products under one platform will also simplify comparisons and investments for savers. Unlike today, transfers between products within the platform will allow tax deferral, and withdrawals after age 60 as a pension will receive a limited capital gains tax exemption, replacing the current full exemption in provident funds for investment.

This change significantly impacts savers accustomed to making large deposits in provident funds for investment to benefit from tax advantages that can amount to millions of shekels. The current annual deposit limit in these funds is about 83,000 shekels, enabling substantial tax-free accumulation over time. The reform is expected to allow opening investment accounts from age 18, instead of from birth as currently permitted. The reform's completion is anticipated no earlier than the next state budget legislation and likely will not apply retroactively to existing deposits.

The reform is expected to reshape the financial sector's power dynamics, with banks, insurance companies, investment houses, and insurance agents all poised to contest its details. The Capital Market Authority is expected to oppose the reform behind the scenes, while the Securities Authority supports it as a competition driver. A compromise was reached allowing provident funds managed outside the unified accounts to continue independently but with reduced tax benefits matching the new model.

The committee behind the reform includes senior officials from the Capital Market Authority, Securities Authority, Tax Authority, and Finance Ministry. The final recommendations are expected soon, but legislative action will be required, which must wait for the next Knesset. The reform represents a significant shift in managing public savings, currently totaling about 900 billion shekels.