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Vaccinated people who test positive for Covid-19 only need to isolate for 10 days, while those who are unvaccinated still need to isolate for 14 days.
Vaccinated people who are identified as a close contact now only need to isolate for seven days, while unvaccinated close contacts need to isolate for 10 days.
The change does not apply to household contacts, who health officials say are at highest risk of catching the virus.
Associate health minister Ayesha Verrall explained that fully vaccinated people who catch Covid-19 are much less infectious after day 10 because the amount of viral, genetic material declines faster.
"If you have Covid and you're vaccinated, that will help you clear the infection much more quickly," she said.
Verrall said the change also reflected the different transmission dynamic of the Delta variant.
"We know the Delta variant has a much shorter incubation period of just 10 days. So we can reduce all contacts' isolation periods."
The changes are expected to take effect from today.
To be considered fully vaccinated, people need to have had their second dose at least seven days ago.
Verrall said anyone leaving isolation still needed to be symptom-free for at least 72 hours, and have returned a negative test.
"But we haven't done away with testing like other countries have done away with isolation in favour of testing. This is still a cautious approach," she said.
The changes were hinted at last month by Director-General of Health Ashley Bloomfield.
The managed isolation period for international travellers arriving in New Zealand was also shortened to seven days on Sunday, with travellers required to spend a further three days in home isolation.
Meanwhile, the Ministry of Health will now only be using the 'casual plus' contact category in a narrow range of circumstances.
Verrall said there was very little evidence of transmission in that category.
"We had, at some stage, close to 30,000 casual-plus contacts in the contact tracing system earlier in this outbreak, and we found a very low risk of them actually catching Covid - about 0.1 percent," she said.
"What's changed is that we won't pursue that very marginal benefit of contact tracing large volumes of very low-risk contacts, for example such fleeting encounters as might occur for customers in a supermarket.
"Keeping the contact tracing categories as they were would have resulted in some people being identified as contacts when the data now tells us they're at very, very low risk."
Schools and business would receive advice about how to avoid potential close contact exposures as part of the shift to the Covid-19 protection framework, she said.