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Provident Funds – Tax Withholding Exemption for Low-Income

About a year ago, the Tax Authority published a bulletin that permits management companies to refrain from withholding taxes when individuals withdraw severance pay and retirement funds. The rules were in effect until the end of 2020. Recently the Tax Authority extended their validity until the end of 2021.

Until now, those who wanted to make withdrawals from their retirement funds and/or withdraw the severance pay component from a provident fund, and the employer had not provided tax withholding instructions, were required to apply to the Assessing Officer for a withholding certificate before withdrawing the funds.

In order to simplify the process  for low-income taxpayers, about a year ago the Tax Authority published a bulletin that exempts them from the obligation to apply to the Assessing Officer for a withholding exemption and permits the management companies to pay out the funds without deducting income tax at source.

The withdrawal amounts and ceilings stated in these rules were determined in light of the fact that in these individuals’ tax computation at the end of the year they would probably have no tax liability for these amounts, given their low income and the credit points to which they are entitled.

Withdrawals of severance pay or retirement funds with a full tax exemption are subject to a number of conditions, including:

  • Accumulated amount
  • Duration of employment
  • Affidavit
  • Income test
  • Actual amount of withdrawal
  • No deposits
  • Assessing Officer’s approval
  • Report to the Tax Authority and submission date of the request

For additional information and for those interested in withdrawing funds on the basis of the bulletin, which has been extended through the end of 2021, please contact our office.