[Smart Saving Life③] Is There a Tax-Exempt Deposit Product for Everyone? ... Yes, There Is!

[Asia Economy Reporter Kim Min-young] Tax exemption benefits are among the financial perks everyone wants to enjoy. In regular commercial banks or savings banks, interest income from savings deposits is subject to a 15.4% interest income tax. Similarly, dividends received from stock investments are also taxed at 15.4% dividend income tax. Capital gains from real estate or stocks are also taxed, following the tax principle that profits are taxable.

Is there a financial institution where ordinary individuals aged 19 or older can receive tax exemption benefits? Yes, there is. It is by becoming a member (cooperative member) of a mutual finance company. Mutual finance companies include Saemaeul Geumgo, credit unions, unit agricultural cooperatives, livestock cooperatives, and forestry cooperatives. They are collectively referred to as mutual finance companies and are considered part of the secondary financial sector along with savings banks.

Let me give an example from my own experience. I am a member of Saemaeul Geumgo. Last April, for reporting purposes, I became a member of the Saemaeul Geumgo near my residence by paying a 1 million KRW investment deposit. The investment deposit for mutual finance companies can be paid from 10,000 KRW up to a maximum of 10 million KRW, and it is refunded upon withdrawal of membership.

After one year, around February this year, I received news that dividends and patronage dividends would be paid on the investment deposit I made. The dividend rate reached 4.3%, and the patronage dividend was 60 KRW per point. Patronage dividends are additional earnings received as a reward for contributing to deposits when having savings or time deposits in the respective mutual finance company. I did not pay any taxes on these dividends and patronage dividends.

This is possible because it is subject to the Restriction of Special Taxation Act. According to this law, dividends received from mutual finance companies are exempt from the 14% dividend income tax. For example, if you invest 10 million KRW as an investment deposit and receive a 3% annual dividend, you get 300,000 KRW.

If you subscribe to deposit products sold by Saemaeul Geumgo or cooperatives, you can receive tax benefits up to 30 million KRW. Interest income tax of 14% is exempted, and only local tax (or special rural tax) of 1.4% is paid. Farmers and fishermen are exempt from tax altogether. Even if you are a member of multiple mutual finance companies, tax benefits apply only up to a total limit of 30 million KRW. Deposits are protected up to 50 million KRW by the depositor protection scheme, similar to bank deposits.

However, investment deposits are not protected by depositor protection. If the cooperative becomes insolvent and is liquidated, you may not get your investment deposit back. To prevent this, you should carefully monitor the management status of each cooperative, which is publicly disclosed on the Saemaeul Geumgo or cooperative websites.

This tax exemption benefit is scheduled to end at the end of this year. According to current law, from 2021, mutual finance deposits and investment deposits are subject to 5% separate taxation instead of tax exemption, and from 2022, a 9% tax is imposed.

However, the industry expects this law to be extended. The political sphere and others have repeatedly extended related legal provisions to maintain the tax exemption benefits of mutual finance companies, which are a major financial tool for farmers, fishermen, and low-income people. Although the Ministry of Economy and Finance and some lawmakers want to revise this law, it is highly likely to be maintained in the 21st National Assembly as well.