Should an old-regime filer with a ₹70 lakh home loan at 8.5% prepay or invest the ₹35K monthly surplus?
Scenario
30% slab, old regime, full ₹2L Section 24 deduction, equity mutual fund SIP as alternative investment, 15 years remaining on loan
Inputs
- Tax slab %
- 30
- Ltcg drag %
- 1
- Years remaining
- 15
- Nominal rate %
- 8.5
- Surplus INR month
- 35000
- Section 24 cap INR
- 2,00,000
- Loan outstanding INR
- 70,00,000
- Equity assumed return %
- 12
Calculation
- 1.
Section 24 tax saving on ₹2L interest deduction
₹2L × 30% → ₹60,000
- 2.
Effective post-tax home loan rate on deductible portion
8.5% × (1 − 30%) for ₹2L slice → 5.95%
- 3.
Expected post-tax equity return (12% gross − ~1% LTCG drag)
12% − 1% → 11%
- 4.
Return spread favouring investing
11% − 5.95% → 5.05% per annum
- 5.
15-year terminal advantage on ₹35K/month SIP vs equivalent prepayment
compounded gap → ₹28.00 L
Conclusion
Pure math favours investing the ₹35K monthly in equity SIP — ~₹28L higher terminal wealth over 15 years compared to using the same money to prepay the loan.
Tradeoffs
Math wins only if the investor sticks with the SIP through drawdowns and does not redeem for non-emergencies. Prepayment is forced discipline; investing is voluntary discipline. Households with job instability or anxiety about debt should weight prepayment more heavily despite the math.