Prepay Your Home Loan or Invest the Surplus? A Tax-Aware Answer
It depends on your tax slab, your loan's effective post-tax rate, and your risk appetite. A simple decision rule.
Loans & Real Estate · 7 min read
You have a ₹50,000 surplus each month. Should you prepay your home loan or put it into an equity SIP? The emotionally satisfying answer is “debt-free”. The mathematically correct answer is: compare your post-tax loan rate with your expected post-tax investment return.
The effective loan rate
Under the Old Regime, the ₹2L interest deduction can lower your effective cost. At 30% slab + cess, a 9% loan costs roughly 9% × (1 − 0.312) ≈ 6.2% on the first ₹2L of interest. Under the New Regime there is no deduction — your loan costs the full 9%. This single fact flips the decision for many people.
The decision rule
- New Regime (no HRA/interest benefit): Prepaying is often rational — a guaranteed 8.5–9% “return” (interest saved) is hard to beat risk-free. Invest only if you are confident of 11%+ long-term equity returns and can handle volatility.
- Old Regime with full ₹2L deduction: Effective cost ~6%. An SIP at 10–11% expected return usually wins over 10+ years. Keep the loan and invest.
- Behavioural edge: If the stress of debt makes you lose sleep, prepay. Peace of mind has real value.
Run your exact numbers with our prepayment calculator and SIP calculator.