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

The Israeli Finance Ministry is finalizing a major reform in savings products that will cap the capital gains tax exemption on investment savings accounts at 200,000 shekels. This unified ceiling will apply across investment savings funds, savings policies, and mutual funds, consolidating these products under a single account. Currently, investment savings funds offer a full exemption on capital gains tax for withdrawals made as a pension after age 60, with exemptions potentially reaching millions of shekels. The reform aims to reduce regulatory arbitrage and equalize tax benefits across different savings products, encouraging the public to shift money from current accounts to interest-bearing financial instruments.

Under the new model, savers will be able to transfer funds between the different products within the unified platform without immediate tax consequences, and a limited tax exemption will be granted for pension withdrawals after age 60. The reform also proposes raising the minimum age to open an investment savings account from birth to 18 years. The total tax benefit allocated by the state will remain unchanged but will be distributed among more savers and across three investment vehicles.

This change will significantly impact savers accustomed to depositing large sums into investment savings funds to benefit from the current unlimited tax exemption. The annual deposit limit for these funds is about 83,000 shekels, allowing exemptions to accumulate to millions over time. The reform is expected to be enacted through upcoming legislation, likely not retroactively affecting existing deposits.

The reform has sparked debate among regulatory bodies. The Israel Securities Authority supports the move as a competition booster, while the Capital Market Authority opposes it, fearing increased fees for the public. A compromise was reached allowing existing investment savings funds managed outside the unified accounts to continue operating independently but with reduced tax benefits aligned with the new model. The reform committee includes representatives from the Finance Ministry, tax authorities, and financial regulators. The final recommendations are expected soon but will require legislative approval by the next Knesset to take effect.