Prepay your home loan when it costs you more after tax than you can reasonably expect a SIP to earn after tax, or when you need the certainty. On the new tax regime, an 8.5% loan costs the full 8.5%, so prepaying is a guaranteed 8.5% return; on the old regime, with yearly interest under the ₹2 lakh cap and a 30% slab, the same loan costs about 5.9%, and a SIP held for 10 years or more has the edge.
Everything below is about a loan on a home you live in. The comparison takes three steps: what the loan really costs you, what a SIP can realistically earn, and what has to be sorted out before either.
The decision in one table
| Your situation | What usually wins | Why |
|---|---|---|
| Credit card or personal loan outstanding | Pay those off first | Card debt costs up to 45% a year; nothing else comes close |
| Less than 6 months of expenses saved | Build the emergency fund first | Money you prepay cannot be taken back out |
| New regime, loan rate 8.5% or more | Prepay, or split | A guaranteed 8.5% is close to what equity has earned over the last 5 years |
| Old regime, 30% slab, yearly interest under ₹2 lakh | SIP | Your loan costs about 5.2–6.2% after tax |
| Old regime, but yearly interest well above ₹2 lakh | Treat it like the new regime | The interest you would save is above the cap, so it earns no deduction |
| Less than 7 years to retirement or to the end of the loan | Prepay | Too little time for equity to recover from a bad patch |
If you only remember one thing: compare the loan's post-tax rate with the SIP's post-tax expected return, then leave a margin for the fact that one is guaranteed and the other is not.
Step 1: What does your loan really cost after tax?
Prepaying saves you the loan's interest rate with no risk. What that is worth depends on your tax regime.
Old regime. For a self-occupied home, interest is deductible up to ₹2 lakh a year under section 22(2) of the Income-tax Act 2025 (formerly section 24(b)). Principal repayment counts towards the ₹1.5 lakh limit of section 123 (formerly 80C), shared with PPF, ELSS and the rest. In the 30% slab, ₹2 lakh of deductible interest saves ₹62,400 of tax (30% plus 4% cess).
New regime. Neither deduction is allowed for a self-occupied home (section 202). Your loan costs exactly its contract rate. If you are unsure which regime is cheaper for you, the new vs old tax regime guide walks through it.
Here is the effective rate in the old regime, assuming all your interest falls within the ₹2 lakh cap:
| Loan rate | 20% slab | 30% slab | New regime |
|---|---|---|---|
| 7.5% | 5.9% | 5.2% | 7.5% |
| 8.5% | 6.7% | 5.9% | 8.5% |
| 9.0% | 7.1% | 6.2% | 9.0% |
Effective rate = loan rate × (1 − slab rate × 1.04).
The catch most comparisons miss is the cap. A ₹50 lakh loan at 8.5% charges about ₹4 lakh of interest in year 3. Only the first ₹2 lakh is deductible, so the interest a prepayment saves you is the part that earns no deduction anyway. For that borrower, the loan costs the full 8.5% at the margin even in the old regime. The deduction only lowers your real cost once the outstanding balance falls below about ₹23.5 lakh at 8.5% (about ₹26.7 lakh at 7.5%).
Rates for prime borrowers have come down: SBI home loans start at 7.25% (from 1 April 2026) and HDFC Bank's range is 7.75–13.20%. Older loans and some housing finance company loans are still above 9%, and floating rates move with the lender's benchmark, which for most bank loans is linked to the RBI repo rate.
Step 2: What can a SIP realistically earn after tax?
The Nifty 50 Total Return Index has compounded at 12.38% a year since inception, but only 8.32% a year over the five years to 31 August 2026 (NSE factsheet). Long-run equity returns of 10–12% before tax are a reasonable planning range. They are not a promise, and five-year stretches well below that happen.
Equity fund gains held over 12 months are taxed at 12.5% above ₹1.25 lakh a year (for sales from 23 July 2024), plus cess. On a single ₹2 lakh investment held 18 years, that turns 10% before tax into about 9.4% after tax, and 12% into about 11.3%.
Put the two steps together. At 8.5% on the new regime, a SIP has to earn more than 8.5% after tax just to match a risk-free prepayment, which means about 9% or more before tax, every year, for the rest of the loan. At 5.9% on the old regime, it has a 3–5 point cushion. That gap is the whole decision.
Step 3: Sort out what comes before both
Three things go ahead of any prepayment or SIP:
- An emergency fund. Prepaid money is gone. If you lose your job a month later, the bank will not hand it back. Keep 4–6 months of essential expenses, EMI included, somewhere you can reach in a day. The emergency fund guide covers how much and where.
- Expensive debt. Credit card debt runs at up to 45% a year (3.75% a month at SBI Card, HDFC Bank and ICICI Bank, as of October 2026). Clear it, and any personal loan, before touching a home loan. See how to pay off personal loan and credit card debt.
- Term and health insurance. A home loan without term cover leaves your family with the EMI if something happens to you.
A worked example: ₹2 lakh against a ₹50 lakh loan
Illustrative. A ₹50 lakh loan at 8.5% for 20 years has an EMI of about ₹43,400 and total interest of about ₹54.1 lakh. After 24 EMIs, the borrower gets a ₹2 lakh bonus. The loan is on the new regime, or large enough that the cap makes no difference.
| Option | What happens | Value at the original loan end (month 240) |
|---|---|---|
| Prepay ₹2 lakh, keep EMI the same | Interest falls by about ₹6.6 lakh; loan ends 19 months early. The freed EMI is then put into a SIP for those 19 months | About ₹8.9 lakh at 10% (about ₹8.8 lakh at 8%, ₹9.1 lakh at 12%) |
| Invest ₹2 lakh as a lump sum for 18 years | Nothing changes on the loan | About ₹10.1 lakh after tax at 10%; ₹13.8 lakh at 12%; ₹7.4 lakh at 8% |
Once tax on the SIP gains is counted, the break-even is about 9.2% a year before tax (about 8.6% if you ignore tax). Below that, prepaying comes out ahead; above it, investing does. That is the 8.5% loan rate showing up in a different form, which is why the rate comparison in steps 1 and 2 is the right shortcut.
The same example shows why timing matters. Prepay in the early years, when most of each EMI is interest, and choose a shorter tenure rather than a smaller EMI. If this borrower had asked for a lower EMI instead, the EMI would drop by only about ₹1,800 and the interest saved would be about ₹1.9 lakh rather than ₹6.6 lakh. You can run your own numbers in the loan prepayment calculator, and see the full schedule in the home loan calculator.
When does a hybrid split make sense?
Split the money when the maths is close and the risk matters to you. That covers most new-regime borrowers at 7.5–8.5%: a SIP may well win over 15 years, but a prepayment wins for certain.
In the example above, a 50/50 split puts ₹1 lakh into the loan and ₹1 lakh into a SIP. The prepaid half saves about ₹3.4 lakh of interest and cuts 10 months. The invested half would grow to about ₹5.6 lakh before tax over 18 years at 10%. Neither choice is wasted, and you are not betting the whole bonus on one outcome.
A simpler hybrid is one extra EMI a year. On a ₹50 lakh, 20-year loan at 8.5%, that cuts the loan to about 16 years 9 months and saves about ₹10.3 lakh of interest, while your monthly SIP carries on. Use the SIP calculator to see what your monthly surplus could grow to alongside it.
A workable rule of thumb: on the new regime with a rate above 8%, put at least half of any lump sum into the loan. On the old regime with interest well inside the cap and 10 years or more left, put it into the SIP.
How to prepay without losing money
- No charges on floating-rate loans. Under the RBI (Pre-payment Charges on Loans) Directions, 2025 (RBI/2025-26/64, dated 2 July 2025), no bank, NBFC or housing finance company may charge for prepaying a floating-rate loan taken by an individual for a non-business purpose. This applies to loans sanctioned or renewed from 1 January 2026, for part or full prepayment, from any source of money and with no minimum lock-in. Banks were already barred from charging on floating-rate home loans before this.
- Fixed-rate loans can carry a charge. It is set by the lender's approved policy. Check your sanction letter before you pay.
- Ask for tenure reduction. Tell the lender in writing that the prepayment should reduce tenure, not EMI.
- Interest already paid stays deductible. If you are on the old regime and close the loan mid-year, interest paid that year still counts. What you give up is the deduction in future years.
The next step: put your own loan balance, rate and lump sum into the loan prepayment calculator, then compare the interest saved with what the same money could become in the SIP calculator. If you haven't bought yet, the earlier question is is buying a house worth it at today's rates.
