Prepay vs Invest
Surplus cash flow every month. Knock down loan principal or push the same money into a parallel SIP? Same horizon, post-tax delta on both sides.
The two sides
The prepay side compounds the saved interest at the loan rate. Every rupee of principal you knock down stops accruing interest at that rate from that month forward — a guaranteed return equal to the loan rate, with zero market risk. If the loan is a Section 24 home loan, the effective post-tax cost of the interest you avoid is lower (because the deduction was reducing your taxable income); the calculator handles this when the Section 24 toggle is on.
The invest side runs a parallel SIP of the same surplus and applies LTCG at 12.5% on gains above ₹1.25 lakh per FY (single-FY redemption). The pre-tax SIP corpus is the standard SIP future-value formula. The net post-tax gain is the corpus minus the original contribution minus the LTCG hit.
The Section 24 quirk
Section 24 of the Income Tax Act allows up to ₹2,00,000 deduction per financial year on home loan interest for self-occupied property under the old tax regime. For someone in the 31.2% slab, that's worth up to ₹62,400 a year in tax saved. The catch: only interest counts, not principal. If your year-1 interest is well above ₹2 lakh, you're already capped — additional prepayment doesn't change your tax deduction. If year-1 interest is below the cap, every rupee of interest you save by prepaying also reduces your deduction. The calculator approximates this by adjusting the post-tax benefit of prepayment when the Section 24 toggle is on.
What this doesn't capture
Liquidity. Prepayment is a one-way door — once the principal goes back, getting it out again means taking a new loan. The SIP corpus is fully liquid (subject to exit load on units under one year). For someone in a stable, predictable income stream prepayment is fine; for someone with variable cash flow, the liquidity gap matters. The calculator doesn't try to monetise this either way. See the EMI calculator for the detailed amortization schedule and the SIP calculator for the equity side in isolation.
Frequently Asked Questions
Why isn't this a simple 'whichever rate is higher wins' answer? +
Because loan rates and investment returns aren't apples-to-apples. Home loan interest under Section 24 is tax-deductible up to ₹2,00,000/year for self-occupied property, which reduces your effective post-tax cost of borrowing. Equity SIP returns are uncertain and taxed at 12.5% LTCG above ₹1.25 lakh per FY. Once both sides are pulled to a post-tax basis, the comparison gets closer than the headline numbers suggest.
What if it's a personal loan, not a home loan? +
Personal loans don't carry any Section 24 deduction. Their effective post-tax cost equals the nominal rate, which is typically 12-18%. Almost no realistic SIP assumption beats that, so prepaying a personal loan is almost always the right move. The Section-24 deduction toggle in the calculator handles this; switch it off for personal loans.
Should I prepay even if my loan rate is fixed for the long term? +
Fixed-rate home loans usually carry a 2-4% prepayment penalty, which eats into the savings. Read the sanction letter. RBI rules since 2014 only ban prepayment charges on floating-rate home loans taken by individual borrowers. NBFC personal and business loans almost always carry a penalty.
What about psychological factors? +
A real one, especially for retirees and risk-averse households. Owning a home outright with zero debt has a psychological dividend the calculator can't show. If sleeping better at night matters more than the optimal post-tax math, prepay even when the math marginally favours investing.