How to use this calculator
- Outstanding principal: the principal balance today, from the latest loan statement or the bank's app. Not the original loan amount.
- Interest rate: the rate you pay now. On a floating-rate home loan it may have changed since you borrowed, so take it from the latest statement or the last rate-reset letter.
- Remaining tenure: the EMIs left, in months. The amortisation schedule or statement shows this.
- Lump sum: the amount you can spare after keeping an emergency fund aside.
- Expected return after tax: what the investment you have in mind is likely to earn per year after tax. A 7% FD in the 30% slab is roughly 4.9% after tax, before cess.
How we compare
Both choices cost you the same every month until your loan's original end date:
- Prepay: the lump sum reduces the principal and the loan closes early. From then on, the EMI you no longer pay is invested every month at your expected return.
- Invest: the lump sum is invested today and grows until the loan's original end date. You keep paying the EMI as usual.
We compare the two investment values on the original end date. The break-even return is the post-tax return at which both are equal. If you expect less than that, prepay. If you expect clearly more and can live with the swings, investing is likely to win.
Worked example: a home loan
₹30 lakh outstanding at 8.75% with 18 years left, and ₹5 lakh to deploy:
| Interest saved by prepaying | ₹13,56,129 |
| Loan closes earlier by | 5 yrs 7 mos |
| Break-even post-tax return | 9.06% |
| At 7% return: prepay path | ₹22,50,499 |
| At 7% return: invest path | ₹16,89,966 |
| At 12% return: prepay path | ₹25,80,184 |
| At 12% return: invest path | ₹38,44,983 |
At a 7% post-tax return, prepaying leaves you with more. At 12%, investing does, but only if that return actually arrives over 18 years. The deciding number is the break-even of 9.06%: ask yourself how confident you are of beating it after tax, every year.
How the home loan tax deduction changes the answer
If you are on the old tax regime, in the 30% slab, and all your home loan interest falls within the ₹2 lakh Section 24(b) limit, part of every rupee of interest comes back as tax saved. Your effective loan rate is about 6.13%, not 8.75%.
Run the same ₹5 lakh through at that rate and the break-even return drops to 6.26%. The interest saved falls to ₹7,93,281 in effective terms. A tax-saving borrower has a weaker case for prepaying; one on the new regime gets no deduction on a self-occupied home and should use the full rate.
Prepayments of home loan principal can count under Section 80C (old regime), but only within the ₹1.5 lakh limit shared with EPF, PPF, insurance and the rest. Most salaried people use it up already.
Car and personal loans: a different picture
These loans have no tax benefit for most people and higher rates, so the bar for investing is higher:
| Car loan: ₹6 lakh at 9.5%, 4 years left, ₹2 lakh lump sum | Break-even 9.66% |
| Car loan: interest saved | ₹70,755 |
| Personal loan: ₹4 lakh at 14%, 3 years left, ₹1.5 lakh | Break-even 14.38% |
| Personal loan: interest saved | ₹57,103 |
Few safe investments earn 14.38% after tax, and over 3 years even equity is unpredictable. For short, costly loans prepaying almost always wins. Check the prepayment charge first: fixed-rate car and personal loans can carry one, and the personal loan foreclosure calculator shows the net saving after it.
Common mistakes
- Comparing a pre-tax return with the loan rate. The loan saving is tax-free; the investment return is not. Always enter the after-tax figure.
- Using the emergency fund. Money prepaid into a loan is hard to get back. Keep six months of expenses liquid first.
- Investing the money but not the habit. The invest path assumes you leave the money alone. If it is likely to be spent, prepaying is the safer choice.
- Ignoring prepayment charges. Floating-rate loans to individuals carry none; fixed-rate loans may. Deduct any charge from the lump sum before you enter it.
Assumptions
- Constant loan rate and a constant post-tax return compounded monthly. Real returns vary year to year.
- The prepayment is made now, reduces tenure, and has no charges.
- Tax deductions are not modelled automatically; adjust the rate as shown above. For the reasoning behind the choice, read prepay your home loan or invest?
Frequently asked questions
What return should I enter for a mutual fund or FD?
Enter what you realistically expect after tax, not the best year you remember. FD interest is taxed at your slab rate, so a 7% FD in the 30% slab gives under 5% after tax. Equity funds held over a year pay 12.5% tax on gains above ₹1.25 lakh a year. A long-run equity figure is a guess, so try a cautious and a hopeful number.
How do I include the Section 24(b) home loan tax benefit?
Under the old regime, interest on a self-occupied home is deductible up to ₹2 lakh a year. If all your interest falls within that limit, enter a lower loan rate: your rate × (1 − your tax slab). For 8.75% in the 30% slab, that is about 6.1%. If your interest is well above ₹2 lakh, the extra part gets no relief, so use your real rate. The new regime gives no such deduction.
Why compare at the end of the original tenure?
It is the only fair comparison. If you prepay, the loan closes early and your EMI is freed up, so we invest that EMI every month until the original end date. If you invest, the lump sum grows for the whole period. Both paths then cost you exactly the same each month, so the higher final value is the better choice.
Why is the break-even return slightly higher than my loan rate?
Banks quote loan rates as a yearly figure charged monthly, so 8.75% on a loan costs a little more than 8.75% a year once monthly charging is counted. Investment returns are entered as a plain yearly figure. The break-even return corrects for this, which is why it sits a fraction above the loan rate. Use the break-even, not the loan rate, as your test.
Should I prepay or invest if my bank reduces the EMI instead of the tenure?
This calculator assumes the prepayment shortens the tenure and the EMI stays the same, which saves the most interest. Many banks reduce the EMI by default after a part-payment. If you want the tenure cut, ask for it in writing when you pay. To compare both options for your loan, use the EMI vs tenure calculator.
Is it sensible to split the money?
Yes, when the result is close or you are unsure about future returns. Splitting gives you a guaranteed saving on part of the money and growth potential on the rest, and keeps some cash liquid. Run the calculator twice, with each half, to see what each part does on its own.