Elad Katzir was taken from Kibbutz Nir Oz during the Hamas attacks on southern Israel on 7 October.
His body has been brought back to Israel, the Israel Defense Forces (IDF) and Israeli Security Agency (ISA) said.
He was identified by medical officials, and his family has been informed.
The IDF and ISA said in a joint statement: “The body of the abductee Elad Katzir, who according to intelligence was murdered in captivity by the Islamic Jihad terrorist organisation, was rescued overnight from Khan Yunis and returned to Israeli territory.”
They said his remains were located using “precise” intelligence.
Mr Katzir, 47, was abducted from Nir Oz with his mother Hanna, 77.
She was released in November along with 104 other hostages during a six-day ceasefire at the end of November.
His father, Avraham, was murdered in the kibbutz, the IDF and ISA said.
Mr Katzir’s sister, Carmit Palty Katzir, blamed Israeli authorities for her brother’s death in a post on social media, saying he would have returned alive had they agreed a new truce deal.
“Our leadership is cowardly and driven by political consideration, which is why this deal has not happened yet,” she wrote on Facebook.
“Prime Minister, war cabinet, and coalition members: Look at yourself in the mirror and say if your hands didn’t spill blood.”
In January, Palestinian militant group Islamic Jihad published a video purporting to show Mr Katzir speaking from captivity in Gaza.
It was not clear if he had been filmed under duress or was able to speak freely.
In the video, Mr Katzir said he had been close to dying more than once, and called on the Israeli government to stop the war and bring him and other hostages home. He also repeatedly said he loved and missed his family.
“Our mission is to locate and return the abductees home,” the IDF and ISA said on Saturday.
They said they are “working in full coordination with the relevant national and security bodies and will continue until the task is complete.”
The 7 October Hamas attacks killed about 1,200 people, most of them civilians.
Some 33,137 people have been killed in Gaza since then, the Hamas-run health ministry says. This includes at least 46 deaths over the past 24 hours, a ministry statement said.
About 129 hostages remain unaccounted for after being kidnapped – at least 34 of them are presumed dead.
According to Israel, 253 Israelis and foreigners were taken during the attacks.
Israel gives an official figure of 134 hostages because it includes four people taken hostage in 2014 and 2015. Two of these are believed to have died.