Severance Pay Exemption
Severance pay in Israel is partially exempt from income tax. The exemption is calculated as: last monthly salary × number of years of service, up to a maximum of ₪13,310 per year of service (2026). The exempt amount is tax-free. Any excess above the exemption is taxable as ordinary income or can be spread over 6 years.
Severance Pay Tax Treatment
| Component | Tax Treatment |
|---|---|
| Up to ₪13,310 × years of service | Exempt from income tax |
| Excess above exemption | Taxable as income OR spread over 6 years |
| Pension fund severance (Section 14) | Released to employee tax-free (within exemption) |
| Vacation pay-out | Fully taxable as income |
| Sick leave pay-out | Partially exempt |
Example
Employee dismissed after 10 years. Last salary: ₪20,000/month.
Total severance: ₪20,000 × 10 = ₪200,000
Exempt amount: ₪13,310 × 10 = ₪133,100
Taxable excess: ₪200,000 − ₪133,100 = ₪66,900
If taxed normally (47% bracket): ₪31,443
If spread over 6 years: ~₪11,150/year → may be taxed at lower brackets = ~₪18,000 total
Savings from spreading: ~₪13,000
Form 161 and 161A
Upon termination, the employer fills out Form 161 (employer's severance statement) and the employee fills out Form 161A (employee's tax election). Form 161A is where the employee elects the tax treatment: exemption, spreading, or regular taxation. This is a critical decision that affects the tax outcome significantly. Consult with a tax advisor before submitting Form 161A.
Tips
- Always consult a CPA before choosing the severance tax treatment on Form 161A
- Spreading over 6 years is usually beneficial if you have high income in the current year
- The exemption ceiling is per employer – workers with multiple jobs get multiple exemptions
- Section 14 (pension fund severance) is usually more favorable – ensure it's in your employment contract
- Unused sick leave payout may qualify for partial tax exemption
בסיס חוקי
- Section 9(7A) – Severance pay exemption
- Section 8(g) – Spreading of severance over 6 years
- Section 14 – General approval for pension fund severance
Important Note: The information on this website is for general informational purposes only and does not constitute professional tax advice. Consult a qualified tax advisor before making financial decisions.