Prepay the loan or invest?
Should my spare money prepay the loan or be invested?
by ₹7.66 L: ₹46.4 L invested vs ₹38.74 L prepaid then invested
Net position by year (investments less loan)
How this is calculated
Rules checked against their sources on 29 September 2026. Tax year FY2026-27.
The question, stated fairly
Money paid into a loan earns the loan's rate, guaranteed and tax-free: prepaying an 8.5% loan is exactly as good as an investment that pays 8.5% after tax with no risk. Money invested instead earns whatever the market gives, before tax. So the comparison is between a certain 8.5% and an uncertain, say, 12% less tax. Most calculators stop at the two rates; this one runs both paths to the loan's original end date so the answer includes what you do with the freed EMI once a prepaid loan closes.
What tilts it toward prepaying
A high rate. Personal and car loans at 11% to 14% are almost always worth clearing first; few investments beat that after tax with certainty.
The new tax regime. Without the 24(b) deduction, a home loan costs its full rate. In the old regime a loan at 8.5% with the ₹2 lakh interest deduction at 30% effectively costs about 6% while the interest is under the cap, which is much easier for investments to beat.
A short horizon or low risk appetite. Equity returns are an average over decades; with five years left on the loan, the guaranteed saving is worth more than a coin flip on markets.
What tilts it toward investing
A cheap, deductible loan and a long horizon. Twenty years of equity at 11% to 12% has beaten 6% to 7% after-tax loan costs in every long stretch of Indian history, though not in every five-year one.
Liquidity. Prepaid principal cannot be taken back in an emergency; an investment can. That option is worth something even when the arithmetic is close.
Retirement contributions with a match. Money into EPF, VPF or an employer-matched NPS earns 8.25% tax-free or better plus the match; that beats prepaying almost any home loan.
The honest middle
The tie point on this page tells you the return at which the two paths meet. If your expected return sits within a couple of points of it, the decision does not matter much and splitting the money is fine. If the loan rate is well above what you would expect after tax, prepay; if well below, invest, and keep an emergency fund either way.
How this fits a retirement plan
A loan is a spending line that ends; an investment is an account that grows. A plan holds both and shows what each choice does to the year the money runs out, which is the number that matters.
Questions people ask
- Does prepaying reduce the EMI or the tenure?
- Banks default to shortening the tenure with the EMI unchanged, which saves more interest, and that is what this calculator assumes. Asking for a lower EMI instead keeps the tenure and saves less; it can make sense when cash flow is tight.
- Is there a prepayment charge?
- Not on floating-rate loans to individuals, by RBI direction. Fixed-rate loans may carry 2% to 4% of the amount prepaid; check the sanction letter. A charge shifts the answer toward investing.
- How is the 24(b) deduction handled?
- In the old regime, interest on a self-occupied home is deductible up to ₹2 lakh a year. Prepaying reduces interest and therefore the deduction; the tax lost is charged against the prepay path, year by year within the cap. In the new regime there is no deduction and nothing to lose.
- Why compare on the loan's original end date?
- Because that is the only fair point. Before it, the prepay path has a smaller loan but no investments; after the loan closes it invests the freed EMI. Comparing at the original end date counts both, so neither path gets credit for money the other has not yet had.
- What return should I assume?
- For equity funds over ten years or more, 11% to 12% before tax is the long-run Indian record with a haircut; for debt, 6% to 7.5%. The tie-point number on this page tells you how much margin your assumption has.
Want the whole picture?
A free Eazyretire plan puts this number next to your income, savings and spending and tells you whether your money lasts to the age you plan for, and what to change if it will not.