Tax benefits: credit, deduction, ceilings and who actually uses them
For every shekel deposited into pension savings, the state returns a portion through two completely different mechanisms: a credit (zikuy) under Section 45a, which reduces the tax itself, and a deduction (nikuy) under Section 47, which reduces the taxable income. The guide explains the difference, shows a full calculation of how much a self-employed person saves on an income of 280,000 shekels, and details who misses out on the benefit without knowing it and how to request a tax refund for six years back.
Two people deposit 1,000 shekels into a pension fund in the same month. For one, the tax bill decreases by 350 shekels, for the other by 200 shekels. The difference stems from the fact that the Income Tax Ordinance contains two separate benefit mechanisms. The first is called a credit (zikuy), and it is established in Section 45a. It comes into play at the end of the calculation: after it is already known how much tax you owe, a fixed percentage of the deposit is subtracted from the amount. The second is called a deduction (nikuy), and it is established in Section 47, and it works one stage earlier: it reduces the income on which the tax is calculated in the first place. The distinction sounds subtle, but it is what determines how much money actually returns to the pocket.
Why the tax bracket turns the tables
The credit rate is fixed by law and stands at 35% of the deposited amount, and it is identical for every person at every income level. The deduction, by contrast, is equal to the depositor's marginal tax bracket, the percentage that applies to the last shekel earned that year. The meaning becomes clear when numbers are inserted. A deposit of 1,000 shekels in the deduction channel is worth 100 shekels at the 10% bracket, 200 shekels at the 20% bracket, and 470 shekels at the top bracket of 47%. The same 1,000 shekels in the credit channel are worth 350 shekels for all three. The reversal occurs at the 35% bracket. Below it, a shekel in the credit channel is worth more; above it, the deduction overtakes it. Hence the separate ceilings set by the legislator for both channels.
Section 45a: the credit and its ceilings
The credit is given on funds that the saver themselves puts into savings, and not on the part that the employer deposits. For an employee, this is the line that is deducted from the payslip every month, usually 6% of the salary. The ceiling is built from two conditions that must be met together: the deposit does not exceed 7% of the eligible income, and the eligible income is limited to 9,700 shekels per month in 2026. Hence, the maximum monthly deposit that enjoys a credit is 679 shekels, 8,148 shekels per year, and the maximum credit is 2,852 shekels per year. The employee receives it automatically in the payslip. For a self-employed person, the section works at a different rate: a credit on a deposit of up to 5.5% of the eligible income, whose ceiling is 232,800 shekels per year. The deposit that enjoys a credit reaches 12,804 shekels and the credit itself 4,481 shekels, and it is claimed in the annual report.
Section 47: the deduction and who it is open to
The deduction is the source of the greater benefit for those whose income is not insured by a pension. A self-employed person who is considered a 'preferred member' (amit mutav) is entitled to deduct from the taxable income a deposit of up to 11% of the eligible income, up to 25,608 shekels per year in 2026. Together with the credit component, 5.5%, a total rate of 16.5% and a maximum preferred deposit of 38,412 shekels per year are obtained. For an employee, the story is the opposite. The deduction does not apply to the salary on which the employer is already depositing, because a benefit has already been given for it. It is reserved for income that is not covered by a deposit, and anyone who deposits their own money for it is entitled to a deduction of 11% as a preferred member or 5% if not, as well as a credit of 35% on a deposit of up to 5% additionally, up to 485 shekels per month in 2026 and a credit of about 2,037 shekels per year.
The example: a self-employed person with an income of 280 thousand shekels
Dani is self-employed, and his taxable income after recognized expenses stands at 280,000 shekels per year. His marginal tax bracket in 2026 is 31%. He is considering depositing 38,412 shekels, the full preferred deposit, which splits into 25,608 shekels in the deduction channel and 12,804 in the credit channel.
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Someone who does not deposit at all: the taxable income remains 280,000 shekels. Total tax: 51,112 shekels.
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Someone who deposits the full amount: the deduction lowers the taxable income to 254,392 shekels. Total tax before credit: 43,173 shekels. The credit according to Section 45a (4,481 shekels) is subtracted from the tax bill. Total tax: 38,692 shekels.
The gap between the two paths is 12,420 shekels per year.
Tax refunds six years back
Anyone who discovered that the benefit was not used is not obliged to accept it. Section 160 of the Ordinance allows requesting a tax refund up to six years after the end of the tax year in which the right arose. In 2026, it is possible to submit requests for the tax years 2020 to 2025. An employee who is not required to submit an annual report submits form 135, attaching form 106 and deposit confirmations. A self-employed person requests the refund in the regular annual report. The amount arrives with the addition of linkage differentials and 4% interest per year from the day the tax was paid.
