Decisions

Prepay or Invest?

The return your investments have to beat, after tax, for investing a lump sum to beat putting it into the home loan

About the Prepay or Invest? calculator

The return your investments must beat, after tax, for investing a lump sum to beat putting it into the home loan. Accounts for section 24(b) relief under the old regime, capital gains tax on the investment, and the instalment that frees up when the loan closes early.

How the maths works

Break-even return

The rate at which prepaying and investing leave you with exactly the same wealth

Certain side

Prepaying returns the loan's own rate, guaranteed and tax-free, and closes the loan early - after which the whole instalment is free and invested

Uncertain side

Investing returns whatever the market gives, taxed at 12.5% on exit above the ₹1.25 lakh exemption

Old regime

Interest deductible up to ₹2,00,000 a year under section 24(b), which lowers what the loan really costs and therefore lowers the bar

New regime

No deduction on a self-occupied property, so the loan costs its full rate and the bar is higher

A worked example

₹5 lakh bonus against a ₹35 lakh loan

The break-even is around 9.7% after tax. Prepaying removes roughly ₹9 lakh of interest with certainty; investing has to beat 9.7% every year for fifteen years to do better, which is not impossible and is not a promise.

How to use it

1. Enter the outstanding loan, its rate and the years left
2. Enter the lump sum you are deciding about
3. Say which tax regime you are on - it changes the answer materially
4. Read the break-even return, and compare it against what you honestly expect after tax

What it accounts for

• Solves for the break-even return rather than asking you to guess one
• Models section 24(b) relief year by year against the statutory cap, on both schedules
• Counts the instalment freed when the loan closes early, which comparisons that stop at the payoff date miss
• Takes the prepayment charge out of the money you have rather than adding it on top
• Charges exit tax on the investment, since that is where the money is actually taken out

Why it is worth working out

• Replaces a guess with a threshold you can test
• Shows how much of the case for keeping a loan rests on a deduction the new regime removed
• Prices the certainty of a prepayment against the expectation of a return
• Makes clear that the freed-up instalment is part of the return on prepaying

Questions people ask

What does the break-even return actually mean?

It is the annual return, after tax, at which prepaying and investing leave you with exactly the same wealth at the end of the loan. Above it, investing wins; below it, prepaying does. It is more useful than the headline difference because it does not depend on the return you guessed — it is a threshold you can hold against something you actually know.

Why is the break-even higher than my loan rate?

Two reasons. The interest a prepayment saves is not taxed, while an investment is charged 12.5% on its gains at exit. And prepaying closes the loan early, after which the whole instalment is free and gets invested — a return most comparisons miss entirely because they stop at the payoff date.

Does the tax regime change the answer?

Materially. Under the old regime, interest on a self-occupied property is deductible up to ₹2 lakh a year under section 24(b), so an 8.6% loan really costs about 6% to a 30% taxpayer — and the bar an investment has to clear drops with it. Under the new regime there is no deduction at all, the loan costs its full rate, and prepaying becomes considerably more attractive.

Is there a charge for prepaying?

Not on a floating-rate home loan to an individual — the RBI prohibits it. Fixed-rate home loans, business loans and most personal loans can charge 2% to 4% of the amount prepaid. The calculator takes any charge out of the money you have rather than adding it on top, because that is how it works: with ₹5 lakh and a 2% fee you retire about ₹4.9 lakh of principal.

Should I prepay if it empties my emergency fund?

No. A prepayment cannot be reversed, and a borrower who has cleared part of a loan but has no cash is in a worse position than one who has not — the next emergency goes onto a card at 42%, which costs several times what the prepayment saved. Fund the emergency first, then decide about the rest.

Does reducing the EMI or reducing the tenure matter?

Reducing the tenure and keeping the EMI saves far more, because the whole benefit goes to killing interest rather than to comfort. This calculator assumes the tenure falls and the instalment stays, which is what most lenders do by default — but check, because some reduce the EMI instead and it materially weakens the case.

This calculator is for information and education. It is not financial advice — see the disclaimer.