The “comprehensive financial income” tax, which used to be imposed on interest and dividend incomes of more than 40 million won, will now be applied to such incomes of more than 20 million won under a revised income tax bill passed by the National Assembly on Tuesday.

The revision is expected to raise the popularity of tax-saving financial products such as inflation-indexed sovereign bonds and Brazilian bonds.

Fixed deposits and installment savings at banks which incur interest and general equity-linked securities that incur dividend income are likely to lose appeal.

Withholding tax rates will apply to a person’s interest and dividend income of less than 20 million won. Interest and dividend income exceeding 20 million won will be added up with other incomes for “comprehensive income taxation” under progressive tax rates of up to 38 percent.

Some observers say that the latest revision will prompt the rich to turn to real estate and stocks, while others are skeptical that they will shift to the stagnant markets just to save taxes.

The wealthy with a lot of money in fixed deposits or installment savings are expected to reduce their bank savings.

Presuming a bank interest of 3 percent, a depositor’s principal had to be over 1.33 billion won in order to collect more than 40 million won in interest. But with the standard now lowered to 20 million won, those with 670 million won or more in principal are subject to pay comprehensive financial income taxes.

As of June last year, about 124,000 bank accounts had more than 500 million won in each, totaling 425.5 trillion won, out of some 880.3 trillion won in entire savings deposits held by banks nationwide.

Over 51,200 people reported 10.2 trillion won in interest and dividend income last year, according to the Bank of Korea and the National Tax Service.

About 3,000 people reported more than 500 million won in interest and dividend income per person, totaling 5.37 trillion won.

“The market preference for products for which interest becomes a tax base will greatly drop,” said Lee Sun-wook, head of Samsung Securities’ Gangnam Finance Center branch.

“The industry did not expect the comprehensive financial income tax base to fall to 20 million won.”

The super rich could reduce their investment in financial products and increase investment in real estate, according to Lim Joo-hyuk, deputy chief of Hanwha Investment and Securities’ Renaissance branch.

Financial experts say, however, that an exodus of investors from savings deposits to the sluggish real estate, bond and stock markets is unlikely.

Tax-saving products such as inflation-indexed sovereign bonds, Brazilian bonds and insurances that mature in 10 or more years are projected to draw investors.

Mutual funds that invest in shipbuilding and oil fields, to which special taxation rules apply through next year, could also gain popularity.

By Kim So-hyun (sophie@heraldcorp.com)