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Prepay your home loan or invest the money?

Every rupee you prepay earns exactly your loan rate, guaranteed and without tax. Every rupee you invest might earn more, or might not. The answer depends on your rate, your tax regime and how you would actually behave, so here is the arithmetic on one loan and the cases where each side wins.

By 37xBetter · Last reviewed October 2026

One loan, worked through

Take a ₹50 lakh home loan at 8.5% for 20 years. The EMI is ₹43,391. Say you have ₹5,000 a month to spare, and two ways to use it.

If you add the ₹5,000 to every EMI, the loan closes in 15 years 7 months, about 4 years 5 months early, and you pay about ₹13.9 lakh less interest. For the 53 months left after that you have the whole ₹48,391 free, and you invest it. If instead you pay the normal EMI for 20 years and invest the ₹5,000 every month from the start, you have a smaller sum invested for much longer. Here is where each path stands at the end of year 20:

The two paths are level at about 8.7% a year. At 12% investing is well ahead, but 12% is an assumption and the prepayment saving is not, and the invest column is before tax on the gains, which is 12.5% on equity gains above ₹1.25 lakh a year when you sell. These are illustrations of the method, and the prepayment calculator runs your own loan.

What tax does to the answer

In the new tax regime there is no deduction for interest on a home you live in, so every rupee of interest you save by prepaying is a full rupee saved. In the old regime you can deduct up to ₹2 lakh of interest a year under Section 24(b), and that lowers what the loan really costs you, but only on interest within the ₹2 lakh. On a ₹50 lakh loan the interest in the first year is about ₹4.2 lakh, so for many years a prepayment does not reduce your deduction at all, and the full rate applies.

When prepaying is the better choice

1. Your loan rate is high. The higher it is, the harder it is for any investment to beat it after tax.
2. You are within about ten years of retiring. A loan that runs into retirement has to be paid from a pension or a corpus, and clearing it first takes that pressure off.
3. You would not invest the money steadily. The invest column assumes you put the money in every month and leave it alone through the falls, and if that is not how you behave, the prepayment saving is the one you will actually get.
4. Market falls keep you awake. A loan that is gone cannot fall in value.

When investing is the better choice

1. Your loan rate is low, which makes the bar easier to clear.
2. You have fifteen years or more, and you already invest in equity and stay put when markets fall.
3. You are early in your career and your income will rise. Investing now builds the habit, and you can prepay later from raises and bonuses.
4. You are in the old regime and your yearly interest is below ₹2 lakh, so a prepayment would cut a deduction you are using.

Many people end up doing both, with a fixed monthly SIP and a lump prepayment from each bonus, and that is a reasonable middle path.

Before either: three checks

Keep at least six months of expenses in an emergency fund first, because money prepaid into a loan is hard to get back if you lose your job. Make sure term cover would clear the loan if something happened to you. And check your sanction letter for prepayment charges: under RBI's rules, a floating-rate loan to an individual for a non-business purpose carries no prepayment charge, while fixed-rate loans can.