Main opposition Democratic Party of Korea (DPK) Chairman Lee Jae-myung, center, speaks during the party's Supreme Council meeting at the National Assembly in Yeouido, Seoul, Monday. Yonhap

The main opposition Democratic Party of Korea (DPK) has decided to support the government's plan to scrap a controversial scheme that sought to slap taxes on incomes generated from financial investments.

The agreement was welcomed by investors, who argued that if the scheme was implemented, it could negatively impact the stock market by driving wealthy and influential investors to leave in order to avoid taxation.

Following the announcement, Korean shares rallied on Monday, with the benchmark KOSPI gaining 46.61 points and the junior Kosdaq advancing by 25.03 points.

"The Korean stock market is going through a hard time, and I could not overlook the situation faced by 15 million stock investors," DPK Chairman Lee Jae-myung said during the party's Supreme Council meeting earlier in the day.

The decision marks a shift from the party's earlier stance of advancing the financial investment income tax, which was planned for introduction next year, while the government has called for its abolition.

The DPK leader suggested that this decision was inevitable given the current state of the Korean stock market.

"It would be right to push ahead with the plan at all costs in line with the party's principle if the stock market was not in trouble."

He also stated that the decision aimed to prevent political strife with the government and the ruling People Power Party (PPP), adding, "They have been using the tax scheme as a means to attack the opposition party."

Lee underscored the DPK's commitment to "normalize the stock market as a stable tool for corporations to raise capital and individuals to realize returns."

"The party accordingly will spare no efforts to reform relevant legislations and regulations," he added.

A screen on the wall shows the benchmark KOSPI and other real-time financial data at a dealing room at Hana Bank's headquarters in central Seoul, Monday. Yonhap

The tax scheme has been a point of contention for years after being passed by the National Assembly in 2020 under the previous Moon Jae-in administration. Initially set to take effect in 2023, its implementation has been postponed to 2025 under the current Yoon Suk Yeol administration.

Under the tax scheme, capital gains of more than 50 million won ($36,000) from stock investments would be subject to a 20 percent tax, while profits surpassing 300 million won would be subject to a 25 percent tax.

Given the low likelihood of such gains, it was anticipated that only the top 1 percent of all investors would be subject to the financial investment income tax.

However, the scheme faced backlash from a larger group of retail investors, who protested that institutional investors would sell their shares and leave the stock market to avoid taxation. They argued that this exodus would ultimately result in losses for retail investors.

The Yoon administration and the PPP also argued that the financial investment income tax would hinder efforts to tackle the so-called "Korea discount," a phenomenon in which Korean stocks are undervalued compared to global peers due to excessive regulations, lax corporate governance and inter-Korean tensions, among others.

Lee blamed the government for aggravating the Korea discount, arguing that "the recent undervaluation of the stocks is related to heightened military tensions (with North Korea)."

He also said first lady Kim Keon Hee's alleged involvement in a stock manipulation case contradicts efforts to enhance transparency in the stock market.

The Seoul stock market has struggled to gain momentum this year despite several global tailwinds, including the artificial intelligence (AI) boom in the first half.

On Monday, however, the benchmark KOSPI snapped a three-day losing streak, advancing 46.61 points or 1.83 percent to close at 2,588.97 points.

The junior Kosdaq also bounced back from a fall in the previous session, gaining 25.03 points or 3.43 percent to finish at 754.08 points.