Every bonus season the same question: should the money go to the home loan or into investments?
Step 1: what does the loan really cost you?
Your loan's interest rate, adjusted for tax:
- New tax regime (most people now): no tax benefit on a self-occupied home loan → the cost is the full rate, say 8.5%.
- Old regime: interest up to ₹2 lakh a year is deductible. If your interest is above ₹2 lakh, extra prepayment doesn't reduce the tax benefit much; the effective cost on the margin is still close to the full rate.
Prepaying earns you a guaranteed, tax-free "return" equal to that rate.
Step 2: what would investing realistically earn?
- Fixed deposits: below your loan rate, and taxable → prepay wins.
- Debt funds: similar → prepay wins.
- Equity (diversified index funds) over 10+ years: historically higher than home loan rates on average, but not guaranteed, volatile, and taxed on gains above the annual exemption.
So for safe money, prepaying beats almost any safe investment. Equity may beat it over long periods - with risk.
Step 3: the things that come first
- Emergency fund (6 months of expenses).
- Term and health insurance.
- High-interest debt (cards, personal loans) - pay these off before thinking about either.
- Goals with fixed dates (child's education in 5 years) - keep that money safe.
A split plan
Many people do both:
- Prepay a fixed amount every year (e.g. one extra EMI - on a ₹50 lakh, 8.5%, 20-year loan that alone saves about ₹10 lakh and 3 years).
- Invest a monthly SIP for long-term goals.
When to lean towards prepaying
- You're uncomfortable with debt or market swings.
- Your loan rate went up after resets.
- You're in the new regime.
- You want to be debt-free before a planned career break or retirement.
Get a plan for your numbers - it compares prepaying with investing for your loan and tax regime.