# Prepay Home Loan or Invest? A Simple Way to Decide > Got a bonus or some savings? Here is how to decide between prepaying your home loan and investing it, with worked numbers, tax effects and a simple checklist. - **Published**: 2026-11-05 - **Modified**: 2026-11-05 - **Category**: loans - **URL**: https://www.tldr.money/articles/loans/prepay-home-loan-or-invest --- New to loans? Start with the [loans guide](/loans). This page answers one question: **you have extra money, so should you pay off your home loan faster or invest it?** ## The short answer - **Prepay** if your other choice is an FD or a savings account, or if you hate debt. - **Invest** if you have 10+ years, can handle ups and downs, and your loan rate is low. - **Do both** if you are unsure. Many people keep their SIPs going and put bonuses towards the loan. But first, do the three steps below. ## Do these three things first Before any prepayment, make sure you have: 1. **An emergency fund** of 3 to 6 months of expenses, in a savings account or FD. Money you send to your loan is hard to get back. 2. **No costly debt.** Credit card dues and personal loans cost far more than a home loan. Clear them first. See [personal loan vs credit card loan](/articles/loans/personal-loan-vs-credit-card-loan). 3. **Basic cover.** [Term insurance](/term-life-insurance) so your family is not left with the loan, and [health insurance](/health-insurance) so a hospital bill does not push you into new debt. Done all three? Now compare. ## How prepaying "earns" you money When you prepay, you cut your loan balance. You stop paying interest on that amount. So **prepaying earns you a return equal to your loan rate**, with no risk and no tax on it. If your loan rate is 8%, every rupee you prepay "earns" 8% a year, guaranteed. ## Prepay vs FD vs equity | Option | What you get | Risk | Tax | |---|---|---|---| | **Prepay an 8% home loan** | Saves 8% a year | None | None on the saving | | **FD at 7%** | 7% before tax, about 4.9% after tax if you pay 30% | Very low | Interest taxed at your slab rate | | **Equity mutual fund** | Has averaged more than FDs over long periods, but changes every year | High in the short term | Long-term gains above INR 1.25 lakh a year taxed at 12.5% | **What this means:** prepaying beats an FD almost every time. Equity can beat prepaying over 10 or more years, but there will be years when it falls. If that would worry you, prepay. Compare today's deposit rates in [the best FD rates](/articles/banking/best-fd-rates-senior-citizens) and [small savings rates for October-December 2026](/articles/tax-planning/small-savings-interest-rates-oct-dec-2026). ## The numbers: prepaying INR 5 lakh Say you took a INR 50 lakh loan for 20 years at 8% (EMI INR 41,822). After 3 years, you get a INR 5 lakh bonus and prepay it. Your bank will ask: **reduce the EMI or reduce the tenure?** | | What changes | Interest saved | |---|---|---| | **Reduce tenure** | Same EMI, loan ends about 3 years 5 months early | **about INR 12 lakh** | | **Reduce EMI** | EMI drops to INR 37,331 (INR 4,491 less), same end date | about INR 4.2 lakh | **Pick "reduce tenure"** if you want the biggest saving. Pick "reduce EMI" only if you need the monthly breathing room.
Home loan EMIs are mostly interest in the early years. That is why a prepayment in year 3 saves far more than the same amount in year 15. Check how much of your EMI is interest in the [home loan EMI calculator](/tools/home-loan-calculator).
*How we worked this out: standard reducing-balance EMI formula, 8% rate throughout.* ## What about the tax benefit? This only matters if you use the **old tax regime**. - **Section 24(b)** lets you deduct up to **INR 2 lakh a year** of interest on a self-occupied home. - **Section 80C** lets you count principal repayment within the INR 1.5 lakh limit. **The key point:** on our INR 50 lakh loan, you pay about INR 3.7 lakh of interest a year early on. That is well above the INR 2 lakh limit. So prepaying does not cut your deduction at all, and you save the full 8%. The tax benefit only starts to shrink once your yearly interest falls below INR 2 lakh. At 8%, that happens when your balance drops below about INR 25 lakh. Under the **new tax regime**, there is no interest deduction for a self-occupied home, so the full loan rate is your saving. Not sure which regime you are on? Read [new vs old tax regime](/articles/tax-planning/new-vs-old-tax-regime-fy2026-27) and the [income tax deductions guide](/articles/tax-planning/income-tax-deductions-guide). ## Will your bank charge you? On most home loans, no. RBI's pre-payment charges directions say lenders cannot charge individuals a prepayment penalty on **floating-rate loans** taken for non-business purposes and sanctioned or renewed from **1 January 2026**. Many banks already did not charge on older floating-rate home loans either. **Check your sanction letter if:** your loan is fixed-rate, it is from an NBFC or housing finance company and older than 2026, or it was taken for business use. See [your rights as a home loan borrower](/articles/loans/home-loan-borrower-rights-rbi). ## A simple rule of thumb | Your situation | What to do | |---|---| | No emergency fund yet | Build that first | | Card dues or a personal loan | Clear that first | | Money would sit in an FD | Prepay | | Loan rate went up recently | Prepaying is even more worth it | | Under 35, long horizon, calm with market falls | Keep SIPs running, prepay with bonuses | | Close to retirement | Prepay, and aim to be debt-free before you stop working | Planning an early retirement? See [how to calculate your FIRE number](/articles/fire/how-to-calculate-your-fire-number-india). A paid-off home lowers how much you need. ## How to prepay 1. **Check charges** in your sanction letter (usually none for floating-rate loans). 2. **Pay through your bank's app or branch.** Many let you prepay online. 3. **Choose "reduce tenure"** unless you need a lower EMI. 4. **Get a revised repayment schedule** and keep it. 5. **Check your next statement** to confirm the balance dropped. ## Read next - [Increase EMI or tenure when your rate goes up?](/articles/loans/increase-emi-or-tenure) - [Home loan balance transfer: when it is worth it](/articles/loans/home-loan-balance-transfer) - [Repo rate hike: impact on your home loan EMI](/articles/loans/repo-rate-hike-home-loan-emi) - [Home loan EMI calculator](/tools/home-loan-calculator) ## Sources - RBI, Pre-payment Charges on Loans Directions, 2025: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12878 - Income Tax Act, Section 24(b) and Section 80C (old regime); Section 115BAC (new regime) - Interest and tenure figures: tldr.money calculation using the standard reducing-balance EMI formula --- - [More loans articles](https://www.tldr.money/articles/category/loans) - [All articles](https://www.tldr.money/articles)