Prepay or Invest?


As home loans are normally bigger in size, interest costs are also big for an individual. A question arises whether the loan should be prepaid or surplus amount be invested elsewhere.

There is no clear cut answer. An individual has to take decision in the light of three main factors- liquidity, tax implications and cost benefit analysis.

If the major chunk of monthly income goes toward EMI, it is better to prepay. Alternatively, EMI can be reduced by prolonging the repayment period. But if EMI is easily serviceable, you can invest the surplus amount for better return.

Tax deduction of Rs 2 lac is available for interest paid on a home loan under section 24, while the principal payment is eligible for deduction of upto Rs 1.5 lac under section 80C of Income Tax Act.

So after adjusting the amount under the above sections, the effective rate of interest comes down sharply for individuals in the 30% tax bracket. If, however, interest outgo is more than Rs 2 lac, it’s better to pay off a portion of the loan.

Prepaying the loan or it’s portion, particularly in initial years, is advisable, as the major chunk of EMIs goes toward interest. It will drastically bring down the cost of interest. Loan tenure also gets reduced, if EMI continues to be regular.

If you are at the end of the loan tenure, prepayment will not fetch any benefit, as only principal is to be repaid, and the principal payment will continue to be eligible for deduction under section 80C.

You have to shell out a hefty amount of interest, if the home loan tenure is longer. So, it’s better to repay the loan. But you can park the surplus in tax efficient investment options, if return is higher than the interest.


–Kaushal Kishore

10 Comments

  1. It is commendable that you are advising your readers, but most are young and not in a position to buy, although buying rather than renting, should be a goal of every person.
    Thank you.

    Joanna

    Liked by 1 person

    1. It makes sense, what you have stated. In India, the first priority is house. I’ve seen young people of 25 seeking home loans. Banks also oblige them looking to their repaying capacity. Thank you, Joanna, for reading and sharing your views.

      Like

      1. I would like to open a learning and education institute, basically coaching. Where I can teach people how they can earn to live their life happily with the help of creativity.

        A healthy environment for open and creative learning is needed.

        Like

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