Israel Plans Major Tax Reform on Savings Funds with New 200,000 Shekel Exemption Cap

The Israeli Ministry of Finance's Arbitration Committee has proposed a significant reform to the tax exemption rules on savings products such as provident funds, savings policies, and mutual funds. The committee recommends lowering the total tax exemption ceiling for all savings products combined to 200,000 shekels. Currently, individuals over 60 can withdraw from provident funds without paying capital gains tax, even if the amount exceeds 200,000 shekels. The reform aims to unify all savings and investment plans under a single account per citizen to improve transparency and investment planning.

Finance Minister Bezalel Smotrich emphasized that the reform intends to mobilize half a trillion shekels currently idle in bank accounts, redirecting these funds into more sophisticated investment instruments that yield higher returns for savers and increased tax revenues for the state. He acknowledged that while some benefits are being reduced, the reform expands tax advantages across all savings tools. Senior Finance officials, including Chief Economist Shmuel Abramzon and Deputy Budget Director Tamar Levi-Bona, argued that more savers will benefit from the unified tax exemption despite the lower ceiling.

The reform faces opposition from key figures such as Amit Gal, head of the Capital Market Authority, who did not attend the announcement. The Histadrut labor federation is also expected to oppose the changes, as is anticipated resistance within the Knesset. Additionally, large banks will initially be excluded from the reform, a point likely to provoke further debate. Currently, total assets in these savings products amount to approximately one trillion shekels, with 754 billion in mutual funds, 140 billion in savings policies, and 88 billion in provident funds.

The committee's recommendations mark a major shift in Israel's approach to savings taxation, aiming to encourage more efficient capital allocation and broaden the tax benefits across the population, while tightening the exemption limits to curb excessive tax breaks for high savers.