Why This Matters
If you have a ₹50L home loan at 9% and ₹50K of surplus every month, the question is real: prepay aggressively, or pump it into equity SIPs? The answer depends on three numbers — your loan rate after tax benefit, your expected investment return after tax, and your honest behaviour during a 30% market drawdown.
The Core Rule
Prepay if your loan rate (after tax benefit) is higher than your expected investment return after tax. Otherwise invest the surplus.
That's the entire framework. Everything below is just plugging in real numbers.
Loan Rate After Tax Benefit
Under the old tax regime, Section 24(b) lets you claim up to ₹2L of home loan interest per year against your taxable income for a self-occupied property. Section 80C covers up to ₹1.5L of principal repayment (shared with EPF, ELSS, PPF, etc.).
Worked example for a ₹50L home loan at 9% (year 1, ~₹4.5L interest):
- Interest paid: ₹4,50,000
- Deduction allowed: ₹2,00,000 (80C principal usually maxed by EPF anyway)
- If you're in the 30% slab: tax saving ≈ ₹60,000
- Effective interest cost: (4,50,000 − 60,000) / 50,00,000 = 8.8%
Under the new tax regime, no Section 24(b) deduction for self-occupied property. Effective rate = nominal rate (9%).
For a let-out property, the loss from house property can be set off (capped at ₹2L for set-off against other heads), so the maths shifts again — work it out for your case.
Expected Investment Return After Tax
Equity mutual funds: long-term return assumption ~11% nominal, post LTCG (12.5% above ₹1.25L per FY for equity from FY24-25 onwards) → ~9.7% net for most investors.
EPF / PPF: 7.1–8.25% tax-free.
Debt funds: taxed at slab rate post-2023 → ~5.5–6.5% net for most.
The Decision
| Effective loan rate | Expected post-tax return | Action |
|---|---|---|
| 8.8% (old regime, 30% slab) | 9.7% (equity) | Tilt to invest, but don't go 100/0 |
| 9.0% (new regime) | 9.7% (equity) | Razor-thin — behaviour matters more than math |
| 9.0% | 7.5% (PPF/debt) | Prepay |
| 6.5% (legacy fixed-rate loan) | 9.7% | Invest |
Banks cannot charge prepayment penalty on floating-rate home loans for individuals since RBI's 2014 directive. Fixed-rate loans typically charge 2–4%. NBFC loans for self-employed borrowers may have different clauses — read your sanction letter.
The Behavioural Wedge
The math says invest at 9% loan vs 9.7% equity. But equity returns are 9.7% on average, with 25%+ drawdowns en route. If a market crash makes you stop SIPs and panic, your realised return is 4%, not 9.7% — and the loan was the better trade.
Honest self-test: if your equity portfolio fell 35% tomorrow, would you keep SIP-ing? If "no" or "I'm not sure", lean toward prepayment. The guaranteed 9% beat is worth the lost upside.
A Hybrid Most People Should Use
For a ₹50K monthly surplus on a ₹50L home loan at 9% (old regime, 30% slab):
- ₹20K extra principal prepayment → reduces tenure by ~7 years
- ₹25K equity SIP (Nifty 50 index + flexi cap) → long-term wealth
- ₹5K liquid fund → emergency cushion
You capture the guaranteed return on the loan, the equity upside, and you don't blow up your liquidity.
What to Skip
- Don't prepay if you don't have 6 months of expenses in liquid savings.
- Don't break a 7% PPF or 8.25% EPF balance to prepay a 9% loan — the comparison is post-tax (PPF returns are tax-free, so 7.1% PPF ≈ ~10% pre-tax for a 30% slab earner).
- Don't prepay in the last 5 years of a 20-year loan — by then, most of your EMI is principal anyway.
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