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

Israel's Ministry of Finance is finalizing a major reform in savings products, introducing a unified capital gains tax exemption cap of 200,000 shekels across investment savings funds, savings policies, and mutual funds. This marks a significant change from the current system, where investment savings funds offer full tax exemption on capital gains for withdrawals made as a pension after age 60, potentially reaching millions of shekels in tax benefits.

The reform aims to reduce regulatory arbitrage by standardizing tax benefits across different financial products and encouraging the public to shift money from current accounts to interest-bearing financial instruments. The three savings products will be consolidated under a single account, allowing tax deferral when moving funds between them and providing a limited tax exemption upon withdrawal after age 60.

Currently, individuals can deposit about 83,000 shekels annually into investment savings funds, accumulating tax-free benefits worth millions over time. The reform will limit this advantage, affecting savers accustomed to large deposits. Additionally, the minimum age to open an investment account will rise from birth to 18 years.

The reform is still pending legislation, expected no earlier than the next state budget law, and will likely not apply retroactively to existing deposits. The financial sector anticipates intense competition and debate among banks, insurance companies, investment houses, and insurance agents over the new rules.

Behind the scenes, the Capital Market Authority opposes the reform, fearing increased fees for the public, while the Securities Authority supports it as a competition booster. A compromise allows investment funds managed outside the unified account to continue but with reduced tax benefits aligned with the new model.

The reform committee includes senior officials from the Capital Market Authority, Securities Authority, Tax Authority, and Treasury. The final recommendations are expected soon, but legislative action will be required to implement the changes, which will wait for the next Knesset session.