The Real Math Behind Savings Interest
Why the "4%/yr" label isn’t the actual return
A lump-sum deposit sits for the full year, so the whole principal earns a year of interest. An installment savings account splits deposits monthly — only the first month’s deposit sits for a full year, while the last sits for just one month before maturity. Over 12 months, the average deposit is effectively held for about 6.5 months (precisely (n+1)/2), so the same "4%/yr" label yields far less interest than a term deposit.
Real numbers — 500,000 KRW/mo at 4%/yr for 12 months
| Item | Amount |
|---|---|
| Total deposited | 6,000,000 원 |
| Interest before tax | 130,000 원 |
| Interest income tax (15.4%) | 20,020 원 |
| Net interest after tax | 109,980 원 |
The formula is total deposited × annual rate × (months+1) ÷ (2 × months): 6,000,000 × 4% × 13 ÷ 24 ≈ 130,000 KRW before tax. After the 15.4% interest income tax (14% national + 1.4% local, NTS), only 109,980 KRW actually lands in the account. Try the savings interest calculator with your own numbers.
Simple vs. compound — savings usually use simple interest
Most Korean installment savings accounts use simple interest — each deposit earns interest only for the time until maturity, and that interest is not reinvested to earn further interest. Compound interest products add each period’s interest back into the principal before calculating the next period, so the gap versus simple interest widens over longer terms at the same rate. Some term deposits let you choose simple or compound interest, but monthly installment savings are structurally almost always simple interest.
What happens if you cancel before maturity
Cancelling an installment savings account before maturity usually applies the bank’s early-termination rate instead of the contracted rate (e.g., 4%/yr). This rate is set lower the more time remains before maturity, and can fall well below half the contracted rate. For example, closing a 12-month plan after only 6 months typically yields far less interest than the pre-tax figure of 130,000 KRW calculated for the full term. If you might need the cash unexpectedly, consider a flexible-deposit product or splitting savings into shorter terms from the start.
The 15.4% tax and deposit protection
The tax on interest income combines a 14% national rate with a 1.4% local surtax (10% of the national tax), for an effective 15.4%, withheld by the institution when interest is paid at maturity. Separately, deposit insurance covers principal plus interest up to 100M KRW per person per institution, a limit that has already been in effect since 2025-09-01 (Korea.kr). For how income tax works more broadly, see the year-end settlement guide.
Fixed-installment vs. free-deposit savings
Monthly installment savings mainly come in two forms. Fixed-installment plans require the same amount on the same date every month, typically in exchange for a slightly higher rate. Free-deposit plans let you vary the amount and timing within a set limit — better suited to irregular income — but often carry a lower rate. Either way, the "average holding period" principle and the 15.4% interest income tax discussed above apply the same way.