Finance
Prepay Your Home Loan or Start a SIP? The Numbers at ₹5,000 a Month
The cleanest way to think about this question is also the least popular one: prepaying a home loan is an investment that pays exactly your loan rate, with no risk, every month, until the loan is gone. If your loan is at 8.75%, every rupee you prepay earns 8.75%. So the real question is whether you expect a SIP to beat 8.75%, after tax, by enough to be worth the bumpy ride.
The rest of this post puts numbers on that sentence, and then shows three places where it stops being the whole story.
The setup, with every assumption on the table
- Loan: ₹50 lakh, 20 years, 8.75% floating, EMI ₹44,186 (the same loan as in how an EMI is built).
- You have ₹5,000 a month spare, for the full 20 years. It does not rise with your salary; that keeps the example plain.
- Option A, prepay: the ₹5,000 goes to the loan every month on top of the EMI. The tenure shortens. Once the loan is closed, you keep paying yourself the EMI plus ₹5,000 (₹49,186) into the same SIP until month 240.
- Option B, invest: you pay only the EMI, and put ₹5,000 into a SIP every month for 240 months.
- Both options cost you the same cash every month for 240 months, which is the only fair way to compare them. We measure what you hold at month 240.
- Returns are assumed constant and are before tax on gains. Real markets are not constant. I am not predicting any of these rates.
What prepaying does to the loan
With ₹5,000 extra a month, the loan closes in month 187 instead of month 240. That is 53 months, or 4 years and 5 months, early. Total interest drops from ₹56.05 lakh to ₹41.52 lakh, a saving of ₹14.52 lakh, on extra payments of roughly ₹9.35 lakh. Nobody had to pick a fund, watch a market or sit through a bad year.
What the SIP needs to beat that
| Assumed SIP return (per year) | A: prepay, then invest the freed EMI | B: EMI only, SIP throughout | Winner |
|---|---|---|---|
| 6% | ₹30.36 lakh | ₹23.10 lakh | Prepay |
| 8% | ₹31.79 lakh | ₹29.45 lakh | Prepay |
| 10% | ₹33.32 lakh | ₹37.97 lakh | SIP |
| 12% | ₹34.93 lakh | ₹49.46 lakh | SIP |
The tipping point is exactly 8.75%, the loan rate, and the model confirms it: at 8.75% the two options finish level. That is not a coincidence. Money you do not owe and money you hold both grow at the same rate when the rates match.
Look at how lopsided the table is, though. Prepaying is almost flat across scenarios (₹30 to ₹35 lakh), because most of its result is locked in by the loan. The SIP swings from ₹23 lakh to ₹49 lakh. If you want a narrow range of outcomes, prepay. If you want the chance of a much larger number and can live with the chance of a smaller one, invest.
Where I land, and why
Compared with a loan at 8.5% to 9%, an equity SIP has to earn a bit more than that after tax to justify the risk. Long-run equity returns can exceed it, but "can" is doing a lot of work, and 20-year averages hide 3-year stretches where you are down. A sensible split for most salaried borrowers is not either-or:
- Build the emergency fund first (see below). Nothing else should come before this.
- If your loan rate is above roughly 9%, lean towards prepaying. A guaranteed 9% is hard to beat once you adjust for risk and the tax on gains.
- If your loan rate is below roughly 8%, lean towards the SIP, especially if you have 10 years or more before you need the money.
- In between, split the money. The cost of being wrong either way is modest.
That advice would be different for a borrower who loses sleep over debt. A loan that is gone is worth something that no table captures. It is also different for someone who would never actually keep the SIP going in a falling market. A plan you abandon in year three is worse than a plan that earns less on paper.
What changed with the RBI prepayment direction
Before this, the cost of prepaying was a common worry. Under the RBI (Pre-payment Charges on Loans) Directions, 2025, banks, NBFCs and other regulated lenders cannot charge pre-payment charges on floating-rate loans to individuals for non-business purposes, home loans included. The rule applies to loans sanctioned or renewed on or after 1 January 2026. Floating-rate loans to individuals already had this protection under earlier RBI instructions, so for most existing home-loan borrowers the practical news is that the position is now written into formal directions.
Two limits matter. First, fixed-rate loans can still carry prepayment charges as set out in the contract, and any charge applies to the amount you prepay. Second, the lender must state its position in the sanction letter and the Key Facts Statement. Read both before you sign. If your loan is fixed for an initial period, ask what exactly happens to charges during that period.
The upshot: for a floating-rate home loan, the old argument "prepayment penalties eat the benefit" mostly no longer applies. It is one fewer reason to prefer the SIP.
The tax angle, kept to what I can verify
Under the old tax regime, interest on a self-occupied home loan can be deducted up to ₹2 lakh a year under Section 24(b). Under the new regime that deduction is not available for a self-occupied home. The Income Tax Act 2025 renumbers sections from April 2026, but what I could find says the deduction amounts continue. Check the current text, or ask a chartered accountant, before you plan around it.
Here is why it matters to this decision. In this loan, year-one interest is ₹4.34 lakh, well over the ₹2 lakh cap. Annual interest only falls below ₹2 lakh around year 16. So for most of the loan, the interest you save by prepaying is interest you were not getting a deduction for anyway, and prepaying costs you nothing in lost deduction. The calculation changes late in the loan, or on a smaller loan, where the cap actually covers your interest. Principal repayment has its own provisions, which I have left out.
Gains on the SIP side are taxed too. I have not applied that tax in the table. It lowers the SIP columns, which pushes the breakeven return above 8.75%.
Where the simple comparison breaks
Risk. The prepay column is almost certain. The SIP column is a set of assumed constants. A 10% average can arrive as a 40% fall in year 2 followed by strong years, and your SIP buys cheap in that fall, which helps. But if you have to stop investing and sell during it, you do not collect the average.
Liquidity. Money in a SIP can be sold in days. Money prepaid to the bank is gone. You cannot take it back out when the roof leaks or a job ends. Some lenders offer a loan structure where prepaid money can be redrawn, but that is a product feature you have to ask for and confirm, not a given.
Emergency fund. If you have less than about six months of expenses plus EMIs in an easily accessible place, neither option comes first. Fill that bucket. A loan cleared four years early is a bad trade if you then borrow at 14% on a card to fix a medical bill.
A practical way to start
If you are unsure, split the ₹5,000: ₹2,500 to each, and review once a year. Use the EMI calculator to see what a prepayment does to your own tenure, and the compound interest calculator to test SIP return assumptions you find believable. Then pick the assumption you would be comfortable being wrong about.
This article is general information, not financial, medical or legal advice. See the disclaimer. Spotted a mistake? Email hello@hukhlatri.in and we will check and correct it.