Intel will receive a government grant of $300 million over five years and will be eligible to pay a corporate tax rate of only 5 percent for a 10-year period, the ministries said.
The US chip giant plans to hire close to 1,000 more workers at the plant in the southern town of Kiryat Gat by 2023, in addition to the 2,500 that already work there.
"Intel's investment is a strategic asset for Israel's industry," Finance Minister Yair Lapid said in a statement. "This is the biggest investment by a foreign company ever in Israel and is further proof that Israel is at the forefront of technology and innovation."
Intel submitted the investment plan in May and it is widely believed to be aimed at shifting to new 10 nanometer technology.
The finance ministry said the plant would be the most advanced chip facility in the world.
A company spokesman declined to comment. Intel had said January that it would decide on the location of a 10 nanometer plant this year. Israel was one of a number of countries competing to host the new plant.
Intel Israel's exports, mainly from its Fab 28 plant in Kiryat Gat, amounted to $3.8 billion in 2013, down from $4.6 billion the year before.
In its 40 years in Israel, Intel has invested $10.8 billion in plants and development centers and received $1.5 billion in grants. It employs nearly 10,000 people in the Jewish state.