Tax Guide

Should you pay off your home loan early? The real math.

"I have ₹10 lakh extra. Should I prepay my home loan or invest it?"

And one of the most frequently asked finance-related questions. The answer to which has undergone major changes owing to the new tax regime.

In the old regime: home loan interest of ₹2 lakh is deductible under section 24(b). In case of a person belonging to 30% tax bracket, the ₹2L deduction leads to ₹60K tax savings. In effect, the loan only costs 70% of the interest rate. If the loan interest is 8.5%, the after tax interest rate is 5.95%. In case investments earn higher than 5.95% post tax, do not go for pre-payment.

In the new regime: home loan interest on self-occupied property is non-deductible. Thus, loan really costs 8.5%. The mathematics changes – any investment with rate lower than 8.5% post tax loses against prepayment.

What the law says — exact provisions

Section 24(b)

Home loan interest deductible up to ₹2L for self-occupied property — old regime only. Unlimited for let-out property (both regimes).

Section 80C

Home loan principal repayment: deductible up to ₹1.5L — old regime only.

Section 54

Capital gains on property sale exempt if proceeds reinvested in another residential property within specified time.

Section 80EEA

First home: additional ₹1.5L interest deduction for loan sanctioned before 31 Mar 2022. Old regime only.

CA Rishabh's verdict

Bottom line

Old regime + 30% bracket: effective loan cost ~5.95% — compare with investment returns. New regime: loan cost is full 8.5% — prepay unless equity returns justify otherwise.