Prepay the loan, or invest the money?

Nobody can tell you what the market will return. What CAN be computed is the bar: the after-tax return your investment must beat for investing to have been the better call — including the tax subtlety most get wrong.

The rule of thumb — and exactly when it breaks

The advice you'll hear everywhere: "prepay if your loan rate beats the return you'd earn investing — and if it's a home loan on the old regime, discount the rate by your tax slab first." So a 9% home loan for someone in the 30% bracket "really" costs 6.3%, and any investment expected to beat 6.3% should win.

That discount is correct only while your Section 24b interest deduction stays under the ₹2,00,000 cap for a self-occupied house. A ₹30–50 lakh loan at today's rates pays ₹2.7–4.4 lakh of interest a year — far past the cap. Prepay such a loan and you still claim the full ₹2,00,000 afterwards; the interest you saved was earning you no tax relief at all. The discount shouldn't be applied, and the honest bar sits near the full loan rate.

Prepayment charges: mostly a thing of the past

The RBI's Pre-payment Charges on Loans Directions, 2025 bar charges on floating-rate loans to individuals for non-business purposes — home, education and personal loans alike — with no lock-in and regardless of where the money comes from, for loans sanctioned or renewed on or after 1 January 2026. Fixed-rate loans and older agreements can still carry a charge, so check your sanction letter — and if a charge is levied on a loan that qualifies, ask for it back. (Directions text)

“After tax” cuts both ways

The break-even is an after-tax bar, and people usually remember the tax on the loan side while forgetting the tax on the investment side. Both matter, and they push in opposite directions.

• Equity and equity funds: gains on units held over a year are long-term, and taxed at a concessional rate above an annual exemption; sell inside a year and the short-term rate is considerably higher. A 12% expected return is not 12% in your hand.
• Debt funds bought after March 2023 are taxed at your slab rate regardless of holding period. For someone in the 30% bracket that turns a 7% debt fund into roughly 4.9% net — often below the loan rate, which settles the question immediately.
• Deposits and bonds are taxed at slab too, with TDS along the way.
• Prepaying a loan is not a taxable event at all. The interest you avoid is avoided in full — no capital gain, no TDS, nothing to declare. That is a genuine and often overlooked advantage of the prepayment side.

When to prepay regardless of what the number says

• You have no emergency fund yet. Neither prepaying nor investing comes first. A household with no buffer meets its next shock with a credit card at 40%, which undoes years of either.
• There is costlier debt in the room. A card balance or a personal loan outranks both a home-loan prepayment and any investment, and it is not close.
• Your loan is still inside a lock-in. Some agreements refuse prepayment for an initial period. Money set aside now and sent the month the lock-in lifts is usually better than forcing it early and paying a penalty for the privilege.
• The debt is costing you sleep. A guaranteed 9% saving that lets you stop thinking about it can be worth more than an uncertain 11% that does not. That is a preference, not an error.

What the number can't tell you

The break-even treats a market return and a loan's interest saving as interchangeable. They aren't: the loan saving is guaranteed, the market return is not. A 12% expected equity return that beats an 8.2% bar on paper still arrives with years where it's −15%. If the loan keeping you up at night is worth more to you than the spread, that's not irrational — it's a preference the arithmetic can't price.