Prepay your home loan when its after-tax rate beats what the money would earn after tax, and invest when the money can stay invested seven years or more and is likely to earn more. In the new tax regime a self-occupied home gets no interest deduction, so prepaying an 8.5% loan earns a sure 8.5%. That beats a fixed deposit or debt fund after tax, and loses only if equity earns more than about 9.4% a year before tax.

What does a home loan prepayment earn?

Each rupee of principal repaid early stops being charged the loan's rate, so prepaying returns that rate with no market risk and no tax, since interest not paid is not income.

"Prepay or invest" compares two rates: the loan's rate after any tax relief, and the after-tax return elsewhere. The same test settles prepay or SIP: an EMI top-up earns the loan's rate, and a SIP must beat it after tax. Prepaying a floating-rate home loan costs nothing; a fixed-rate loan can carry a charge to weigh against the interest saved, as with personal loan foreclosure charges.

Aditya's ₹5 lakh, tested both ways

Aditya's CTC is ₹30 lakh, in the 30% slab under the new regime for FY 2026-27. A year ago he took a ₹50,00,000 home loan for 20 years at 8.5%, an assumed rate (2026 rates ran from about 7.25% to 10% or more, by credit score), with an EMI of ₹43,391. After 12 EMIs he owes about ₹49,00,500. He has ₹5,00,000 saved beyond his emergency fund.

Prepaying leaves about ₹44,00,500 owed. If he keeps paying ₹43,391, the loan ends after 180 more EMIs instead of 228: 48 fewer, with the last one about ₹22,500. That saves about ₹16 lakh of interest.

The saving arrives late, as about ₹21 lakh of EMIs not paid in the last four years; invested at the loan's 8.5% charged monthly, about 8.8% a year, they are worth about ₹25 lakh. At an assumed 12% a year in an equity fund, ₹5 lakh grows to about ₹43.1 lakh, or about ₹38.3 lakh after 12.5% long-term capital gains tax and 4% cess on gains above ₹1.25 lakh. Investing comes out about ₹13.3 lakh ahead, but below about 9.4% a year before tax, prepaying wins.

What does ₹5 lakh become in each place?

Returns other than the loan's are October 2026 assumptions, not forecasts. The 12% is close to the broad equity index's 12.1% a year from 1995 to September 2026, as the goal-based investing guide notes; the five years to that date gave about 6.4% a year.

Where the ₹5 lakh goes Return (assumed) After tax in 19 years
Prepaid on the 8.5% loan 8.5% charged monthly, no tax about ₹25 lakh
Fixed deposit, 30% slab 6.5%, taxed every year about ₹11.7 lakh
Debt fund, 30% slab 7%, taxed at slab on sale about ₹14 lakh
Equity fund, a weak stretch 6%, 12.5% on gains at sale about ₹14 lakh
Equity fund 10%, 12.5% on gains at sale about ₹27.4 lakh
Equity fund 12%, 12.5% on gains at sale about ₹38.3 lakh

Large banks paid about 6% to 6.5% on FDs in October 2026, so even untaxed an FD earns less than 8.5%. The equity rows assume no surcharge; at Aditya's pay one sale in the 10% or 12% row would take that year's income past ₹50 lakh and add one, unless spread over two years or more. The FI calculator shows what investing the ₹5 lakh instead does to the year you could be financially independent.

Does the old tax regime change the answer?

It lowers equity's bar by about a point. Under the old regime, section 24(b) of the 1961 Act deducts up to ₹2,00,000 of interest a year on a self-occupied home. Aditya's interest stays above that until year 10 even after prepaying, so until then the interest removed saves the full 8.5%.

After that the prepaid loan claims less, then nothing once closed, so he loses about ₹2.5 lakh of tax relief: the prepayment earns a little under 8% a year, and equity needs about 8.4% before tax to beat it. Where all the interest is under the cap, as on a smaller loan, 8.5% in the 30% slab is about 5.85% after tax.

Reduce tenure or EMI after a prepayment?

Keeping the 228 months instead cuts the EMI to about ₹38,964, ₹4,427 less a month. That saves about ₹5.1 lakh of interest, against about ₹16 lakh when the tenure falls, because the full EMI repays principal faster. A lower EMI suits tight monthly cash flow.

When does prepaying win even if equity might earn more?

Prepaying wins when the money cannot stay invested for seven years yet will not be needed back: the FD and debt rows lose to it. It earns more when rates rise: after the RBI raised the repo rate from 5.25% to 5.50% on 7 October 2026, a repo-linked loan costs about 0.25 points more from its next reset. If certainty matters more than a possible ₹13.3 lakh, some borrowers split the sum. If the rate itself is the problem, a home loan balance transfer changes the rate, not the balance.

Dhi shows your home loan next to your cash flow, net worth, protection and goals, and answers from your own numbers what a prepayment changes. Dhi maps your investments to your goals, earns no commissions and never mis-sells.

Frequently asked questions

In rupees, yes: the rate a prepayment earns is the loan's rate whenever you make it, but an early prepayment stops that interest for more years. In the second year of a ₹50 lakh, 20-year loan at 8.5%, about 79% of that year's EMIs is interest.
Under RBI rules (for banks since 2012, for NBFCs since 2014), lenders cannot charge for prepaying a floating-rate loan taken by an individual for a non-business purpose, and almost all bank home loans are floating-rate (about 95% in March 2023, per the RBI). A fixed-rate loan can carry a charge set by the lender, so check the sanction letter before you pay.
Usually not, because money paid into the loan cannot be taken back out unless the lender offers an overdraft or a top-up loan, and the EMI still falls due if your pay stops. Keep six months of essential expenses including the EMI, or nine to twelve if you are the only earner with dependants or much of your pay is variable, and prepay only from savings above that.

This is general information for salaried individuals in India, not personalised financial advice.