[Practical Finance] ISA Sweetens... Will Super Gaemi Also Gather?

Government to Strengthen ISA Tax Benefits
Abolishing 'One Person, One Account' Rule... Covers Both Deposits and Stocks
Surpasses 5 Million Subscribers... Expecting Influx of High-Net-Worth Individuals

Can the Individual Savings Account (ISA) truly become a 'real all-purpose account'? The ISA system is gaining renewed attention following the government's announcement to abolish the 'one account per person' rule and remove the 'financial product barriers.' With growing policy expectations this year, the number of ISA subscribers surpassed 5 million for the first time in February. In particular, the newly established 'Domestic Investment ISA' system is expected to serve as an incentive to attract funds from high-net-worth individuals, who are highly interested in tax savings, into the domestic stock market.

Number of ISA Subscribers Surpasses 5 Million Amid Policy Expectations

According to the Korea Financial Investment Association on the 22nd, as of the end of March, the total number of ISA subscribers reached 5,182,286. The total investment amount reached 26 trillion 705 billion KRW. Compared to the end of last year, there was a net increase of 250,000 subscribers, and the subscription amount saw a net inflow of 2.59 trillion KRW. Although there was continuous capital outflow in the trust-type ISA centered on the banking sector, a net inflow of 2.51 trillion KRW into the brokerage-type ISA centered on the securities industry contributed to the overall increase.

Introduced in 2016 with the goal of 'asset accumulation for ordinary citizens,' the ISA is an account that allows individuals to invest in various financial products such as savings deposits, public funds, and equity-linked securities (ELS). It was called an 'all-purpose account' because it taxes only the net profit by aggregating gains and losses from various financial investment products. Initially operated through discretionary-type accounts managed by financial companies and trust-type accounts where individuals select products and then delegate management, a brokerage-type was added in 2021 allowing individuals to invest directly in stocks. However, the ISA faced criticism for strictly separating the products available by account type (brokerage, trust, discretionary), which limited consumer choice. Additionally, the lack of tangible tax benefits for the public was cited as a drawback.

To address these shortcomings, the Ministry of Economy and Finance announced at the beginning of the year that it would strengthen ISA benefits by benchmarking Japan's Nippon Individual Savings Account (NISA) tax-exempt system. The reform plan includes raising the contribution limit from 20 million KRW to 40 million KRW and expanding the tax-exempt limit on dividends and interest income. The government is also considering integrating the currently three types of ISA or abolishing the 'one account per person' principle. For example, an account that can hold stocks would also be able to hold deposits. However, this requires amendments to laws such as the Restriction of Special Taxation Act and thus needs bipartisan agreement. Although a legislative proposal was pushed during the February extraordinary session of the National Assembly, it was not passed. The market expects that the 22nd National Assembly, which opens on May 30, will reattempt the legal revision.

A particularly noteworthy point is the completely new Domestic Investment ISA product. The Ministry of Economy and Finance decided to allow high-net-worth individuals with annual financial income exceeding 20 million KRW to subscribe exclusively to this product. Existing ISA products restrict subscription if the individual was subject to comprehensive financial income taxation even once in the past three tax years. While there is no tax exemption benefit, a separate taxation benefit (15.4%) is available. However, unlike the existing brokerage-type ISA, this product can only invest in domestic stocks and domestic stock-type funds.

Lee Seung-jun, a tax specialist at Samsung Securities, said, "For high-net-worth individuals, dividend income in general accounts is taxed at a top rate of 49.5%, but when investing through the Domestic Investment ISA account, a separate tax rate of 15.4% applies to dividend income." He added, "Although there is a cumulative investment limit (up to 200 million KRW), from the perspective of high-net-worth individuals, there is no reason not to use this product." Park Se-young, head of the Digital WM Promotion Team at Eugene Investment & Securities and a tax specialist, noted, "High-income earners with high marginal income tax rates face a heavy income tax burden (up to 45%) and additional health insurance premiums under comprehensive financial income taxation, so separate taxation itself can be a significant advantage."

"Domestic Investment ISA Offers Strong Incentives for High-Net-Worth Individuals"

There are various ways to enjoy tax-saving effects with the ordinary and general ISA types. For example, investors in exchange-traded funds (ETFs) may find it advantageous from a tax perspective to invest in ETFs that target overseas stocks or commodities like crude oil. Park said, "For ETFs investing in overseas stocks and commodities, capital gains are taxed as dividend income, so in general accounts, capital losses cannot be offset against dividend income. However, when investing through an ISA, capital losses can be offset, and tax is applied only on net income."

Additionally, customers seeking stable investment returns should note that the income amount subject to ISA's tax exemption or separate taxation is calculated at maturity or upon account termination after the mandatory subscription period. Park recommended equity-linked bonds (ELBs) and bonds with high nominal interest rates, saying, "During the management period, even if interest or dividend income occurs, withholding tax is not applied, allowing full reinvestment of interest and dividends, which can pursue compound interest effects."

For high-net-worth individuals aiming to maximize tax benefits through the Domestic Investment ISA, investing in high-dividend stocks was highlighted as a strategy. Lee explained, "Although the Domestic Investment ISA increases the contribution and tax benefit limits compared to existing ISAs, it is premised on investing in domestic stocks and domestic stock-type funds. From a tax perspective, investing in high-dividend stocks is considered desirable for both ordinary/general and high-net-worth ISAs to maximize tax benefits." Park also commented, "Retired asset owners who are interested in high-dividend stocks and dividend-related ETFs are expected to show particular interest."

Currently, Samsung Electronics is the most preferred stock among ISA customers at major domestic securities firms. For customers investing through KB Securities' brokerage-type ISA, the top stock holdings as of the end of March this year were Samsung Electronics, Samsung Electronics Preferred, and POSCO Holdings. For Samsung Securities customers, the top three ISA holdings were Samsung Electronics, Samsung Electronics Preferred, and Macquarie Infrastructure.

Competition among securities firms to attract ISA customers is fierce, making it another avenue to consider. KB, Korea Investment & Securities, Samsung, Shinhan Investment, Kiwoom, and Daishin Securities are offering fee discounts and prize events for brokerage-type ISA account customers.