Many individuals and businesses in Israel are unaware of the full range of income tax exemptions in Israel available to them. Israeli tax law provides a number of legitimate routes to reduce your income tax liability, from personal tax credits to specific exemption categories for new immigrants, low-income earners, and individuals with disabilities. This guide explains the key exemptions and how to qualify.
How Income Tax Works in Israel
Israel operates a progressive income tax system, where higher earnings are taxed at higher marginal rates. The rates range from 10% on low income up to 50% for high earners, with each bracket applying only to the income within that range. This means effective tax rates for most employees are significantly lower than the top marginal rate.
However, the amount of income tax you actually owe can be substantially reduced through tax credits (Nekudot Zikui) and income tax exemptions in Israel. Understanding both mechanisms is essential for individuals who want to minimise their legally payable tax.
Tax Credits: Your First Route to Reducing Income Tax
Tax credits (Nekudot Zikui — × ×§×•×“×•×ª זיכוי) are the most common way Israeli employees reduce their income tax. Each tax credit point is worth a fixed monetary amount that is deducted directly from your tax liability — not your income. Tax credit points are allocated based on personal circumstances, including:
- Personal credit point: Every resident of Israel receives 2.25 credit points
- Married couples: Additional points may apply depending on the spouse’s working status
- Children: Parents receive additional credit points for each child, with larger allocations for younger children
- New immigrants (Olim): New immigrants receive additional credit points for up to three years after Aliyah
- Discharged soldiers: IDF veterans receive additional credit points following completion of mandatory service
Income Tax Exemptions in Israel: Who Qualifies?
Beyond tax credits, some individuals may qualify for a complete or partial income tax exemption in Israel. Key exemption categories include:
- New immigrants and returning residents: Israel’s tax treaty exemption for Olim and Toshavim Chozrim can exempt foreign-source income from Israeli tax for up to 10 years following Aliyah or return to Israel
- Low-income earners: Individuals whose annual income falls below the tax-exempt threshold are not required to file or pay income tax
- Individuals with disabilities: Qualifying individuals with disabilities are exempt from income tax up to an annual income ceiling, providing significant financial relief
- Pension income: Certain pension income for recipients above retirement age may qualify for partial or full exemption, depending on the source of the pension
How to Claim an Income Tax Exemption in Israel
To claim an income tax exemption or ensure your employer applies the correct tax credits, you must submit a Form 101 (טופס 101) at the start of each tax year and whenever your personal circumstances change. This form notifies your employer of your credit point entitlements. For larger or more complex exemptions — such as the Olim exemption or disability exemption — a formal ruling from the Israel Tax Authority (Reshut HaMisim) may be required.
CWS Israel’s payroll team helps employees and employers navigate the Israeli tax credit and exemption system, ensuring accurate calculations and full compliance with ITA requirements. Contact us for personalised guidance on your income tax situation in Israel.
Frequently Asked Questions About Income Tax Exemptions in Israel
Do new immigrants (Olim) really pay no income tax in Israel for 10 years?
The Olim tax exemption covers foreign-source income — income earned outside Israel. New immigrants and returning residents who qualify under Israel’s tax rules are exempt from Israeli tax on income sourced abroad for a period of 10 years from their Aliyah or return date. Income earned in Israel from the start of residency is subject to Israeli income tax in the normal way, with new immigrants receiving additional tax credit points that reduce their overall liability.
How do I know if I qualify for a disability income tax exemption in Israel?
To qualify for the disability income tax exemption in Israel, you must meet the medical criteria established by the Israel Tax Authority and hold a recognised disability certificate at or above the required percentage. The exemption applies to employment income up to an annual ceiling. A formal ruling from the ITA’s disability exemption unit is required to activate the exemption with your employer.
What is Form 101 and why does it matter for income tax in Israel?
Form 101 (Tofes 101 — טופס 101) is the annual employee tax declaration form in Israel. Every employee must submit it to their employer at the start of the tax year and whenever their personal circumstances change. The form tells your employer how many tax credit points you are entitled to, which determines how much income tax is withheld from your salary. Errors on Form 101 can result in over or under-payment of tax. Contact CWS Israel’s payroll team for help with tax declarations.
