Prepay Home Loan or Invest in SIP Calculator 2026

The answer depends on two rates: your effective post-tax home loan rate versus the expected post-tax equity return. If your loan is at 8.5% and you're in the 30% slab, you get a tax benefit of about 2% on interest (Section 24b), making the effective rate roughly 6.5%. If equity can deliver 12% CAGR minus 10% LTCG, the post-tax return is around 10.8%. In that scenario, investing wins. But risk tolerance, job security, and peace of mind also matter.

Prepaying a home loan gives you a guaranteed, risk-free return equal to your loan interest rate minus any tax benefit foregone. For a 8.5% loan with 30% slab, you save ~8.5% on the prepaid amount — but you also lose the deduction on that portion. The effective return is approximately 8.5% × (1 − 0.2) = 6.8% in this calculator, since only ~20% of your EMI is in the deductible zone after early years.

Yes, significantly. Under Section 24b, you can deduct up to ₹2 lakh on home loan interest per year. In the 30% slab, this saves ₹60,000 annually. Prepaying reduces your outstanding principal and therefore your interest component, which shrinks this deduction. The calculator accounts for this by adjusting the effective return on prepayment downward. For the new tax regime users with no deductions, prepayment becomes even less attractive versus investing.

Not always. Home loan prepayment gives a guaranteed return equal to your interest rate, while equity mutual funds have historically delivered 12–15% CAGR over 10+ year periods. However, equity returns are volatile and not guaranteed. If your loan rate is high (above 9.5%), prepayment starts looking more attractive, especially for risk-averse investors. The key is to compare post-tax returns on both paths before deciding.

Long-term capital gains (LTCG) on equity mutual funds held for more than 1 year are taxed at 12.5% (revised from 10% in Budget 2024) on gains exceeding ₹1.25 lakh per financial year. The first ₹1.25 lakh of gains is exempt. This calculator uses the ₹1 lakh exemption threshold for simplicity. LTCG tax reduces the effective post-tax yield of equity investments and is a key factor in the prepay vs invest comparison.

Always prefer prepayment over extending tenure if you have surplus funds. Extending tenure lowers your EMI but dramatically increases total interest paid — a 20-year loan at 8.5% can cost nearly as much in interest as the principal itself. Prepayment reduces total interest cost. If cash flow is the concern, consider partial prepayment to bring down EMI rather than extending tenure, which is a much worse financial outcome.

Financial planners recommend maintaining 6 months of expenses as an emergency fund before making any lump-sum prepayment. Additionally, ensure your short-term goals (within 3 years) are separately funded. Only deploy genuinely surplus capital for prepayment or long-term investments. Prepaying and then borrowing at a higher rate for an emergency entirely defeats the purpose. Liquidity always takes priority over optimisation.

Yes. Under RBI guidelines, banks and HFCs cannot charge prepayment penalties on floating-rate individual home loans. Fixed-rate loans may have a prepayment charge of 2–4% of the outstanding principal, so always check your loan agreement. Most borrowers in India are on floating rates, meaning they can prepay any amount at any time without penalty. Part-prepayment directly reduces your outstanding principal, lowering future EMIs or tenure.