Can You Get a Tax Deduction When the National Growth Fund Loses Money?

If you’re considering signing up for the National Growth Fund, your biggest worry is probably “losing your principal.” Here’s the bottom line up front: even if the fund loses money, the income tax deduction you’ve already received stays intact, and the government absorbs up to 20% of the loss first. But if you withdraw within 3 years, the tax benefits you received get clawed back — so make sure you understand the loss-offset structure before signing up.

📌 National Growth Fund Losses and Tax Deductions: The Essentials First

The National Growth Fund’s loss-offset structure is different from an ordinary fund. With an ordinary fund, a loss is simply a loss. With the National Growth Fund, government funds sit in a subordinated position and absorb part of the loss first.

“The loss amount itself isn’t deducted from your taxes.” Strictly speaking, “loss offset” refers to two things combined: the government directly absorbing losses (up to 20%), and the income tax deduction that stays in place even if you take a loss.

Let’s start with the 3 key points directly tied to loss offset.

• Government funds absorb up to 20% of losses first
• Even if you lose principal, the income tax deduction for the year you invested stays in place
• However, redeeming or transferring within 3 years triggers a full clawback of the tax benefits you received

💰 The Loss-Coverage Structure — The Government Absorbs 20% First

In the Public Participation National Growth Fund, 120 billion won in government funds is injected into each sub-fund in a subordinated position. Subordinated means that when a loss occurs, the government’s money takes the hit first, and only after that does ordinary investors’ money get reduced (source: Ministry of Economy and Finance).

What “20% Loss Coverage” Actually Means

There’s a common misunderstanding here. It doesn’t mean “the government covers 20% of the amount I personally invested.” It means the government absorbs losses first, up to 20% of the sub-fund’s total size. Within a given sub-fund, the actual loss-protection line can range from 17.5% to 20.8%, depending on factors like the asset manager’s seed investment ratio.

The Real-World Effect of Loss Coverage

Because the government sits in a subordinated position, if a sub-fund posts a -15% loss, that loss is absorbed by government funds first — meaning ordinary investors may see little to no impact. However, once the loss exceeds the government’s coverage line, investors have to bear everything beyond that.

✅ Even With a Loss, the Income Tax Deduction Stays in Place

The biggest appeal of the National Growth Fund’s tax benefits is that the income tax deduction is based on the amount you contributed, regardless of the fund’s rate of return. So even if the fund posts a -10% or -20% loss, the income tax refund you already received won’t be clawed back for that reason.

Income Tax Deduction Rates by Bracket

When you sign up through a dedicated account, the income tax deduction rate is tiered as follows (source: Act on Restriction on Special Cases Concerning Taxation, Article 91-26).

A dedicated account has a limit of 200 million won over 5 years (up to 100 million won per year). With a general account, you can invest up to 30 million won per year, but you get no tax benefits at all. If you’re after the tax benefits, a dedicated account is a must.

9.9% Separate Taxation on Dividend Income

Dividend income gets separate taxation at 9% (9.9% including local tax) for 5 years. Compared to the standard dividend income tax rate of 15.4%, that’s roughly a 5.5 percentage-point saving. It’s also exempt from the special tax for rural development.

⚠️ Watch Out: Redeeming or Transferring Within 3 Years Means a Full Clawback

This is the part of the National Growth Fund’s loss-offset structure you need to be most careful about. Even if fear of losses makes you want to pull out quickly, transferring before 3 years have passed from your sign-up date means every income tax deduction and separate-taxation benefit you’ve received gets clawed back in full.

Redemption Itself Isn’t Possible for 5 Years

This fund is a redemption-restricted, closed-end fund with a 5-year term, so you cannot request redemption from the asset manager for 5 years. However, once it’s listed on the exchange, you can transfer (sell) it to someone else like a stock — and if that transfer happens within 3 years, it triggers the tax-benefit clawback.

What Happens If You Transfer Within 3 Years

• You must return the full income tax refund you received
• You must pay back the separate-taxation benefit
• If the exchange sale price is lower than your cost basis, you take a loss on top of that

If you sign up with short-term money, the tax-benefit clawback can end up being a bigger burden than the loss itself. It’s safer to consider signing up only when you can tie up spare funds for at least 3 years.

🔍 Loss Risk vs. Tax Benefits: Which Weighs More?

This is the part that confuses people considering the National Growth Fund the most. Let’s compare the potential for loss and the tax benefits side by side.

In short, there’s no system that directly deducts the loss amount from your taxes — but even if a loss occurs, the income tax deduction you already received stays in place, and the government absorbs part of the loss first. Think of “loss offset” as referring to this combined effect.

📋 Checklist Before You Sign Up and FAQ

Now that you understand the loss-offset structure, here’s a final list of things to check before signing up.

Self-Check Before You Sign Up

• Is this spare money you can tie up for 3+ years?
• Do you understand it’s a closed-end fund with a 5-year term?
• Are you planning to sign up through a dedicated account? (Tax benefits apply only to dedicated accounts)
• Do you accurately understand what “20% government loss coverage” means?
• Is your comprehensive income tax burden high enough to make full use of the deduction?
• Have you checked the sub-fund’s asset manager and investment strategy prospectus?

Frequently Asked Questions

Q. Can I get a tax deduction for the loss amount itself?
No. The National Growth Fund has no system for deducting the loss amount itself from your comprehensive income. However, the government covers up to 20% of a sub-fund’s losses first, and you still get the income tax deduction based on your contribution regardless of the loss.

Q. If the fund posts a negative return, do I have to return the refund I received?
Not if you’ve held it for 3 years or more. The income tax deduction is based on your contribution amount, so it’s unrelated to the rate of return. However, transferring within 3 years triggers a full clawback.

Q. What if the loss exceeds the government’s 20% coverage?
Everything beyond that is borne by ordinary investors. The government’s coverage is a “shield that absorbs losses first,” not unlimited protection.

Q. Can I still get the 9.9% separate taxation on dividend income even with a loss?
The separate-taxation benefit only applies when a dividend is actually paid out. If there’s a loss and no dividend, there’s simply no income for the benefit to apply to.

Q. If I sign up through a general account, do I miss out on the loss-offset benefit?
A general account has no tax benefits at all. The government’s subordinated loss-coverage effect still applies structurally at the sub-fund level, but the income tax deduction and separate taxation benefits are exclusive to dedicated accounts.

Before you decide to sign up, make sure you thoroughly check your own financial capacity, whether you can realistically hold for 3+ years, and each sub-fund’s management strategy. Keep in mind that loss offset is ultimately a “supplementary device that reduces losses,” not a guarantee of your principal.