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Should you use ₹5 lakh extra cash to prepay your home loan or invest in an SIP?
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Compare using ₹5 lakh to make a home loan prepayment against investing the same amount in equity mutual funds via SIP. See which option creates more wealth over your loan tenure.
Why Prepay vs SIP Is a Real Trade-Off
If you have ₹5 lakh surplus, the choice between prepaying a 9% home loan and investing in a 12% equity SIP is genuinely close once tax effects are factored in. Prepayment saves the loan rate (effectively a guaranteed return). SIPs offer potentially higher returns but with volatility and post-tax adjustments.
Under the old tax regime with full home loan deduction usage (₹2 lakh interest under Section 24(b), ₹1.5 lakh principal under 80C), the effective post-tax cost of a 9% home loan drops to about 6-7%. Versus a 12% equity SIP that nets to roughly 10-11% after LTCG tax — SIP still wins, but only by 3-4% per annum, and that gap can be wiped out by a single bad year of equity returns.
Under the new tax regime (no home loan deduction available), the effective home loan cost stays at the full 9% — and prepayment becomes substantially more attractive. The pragmatic answer for most Indians is a split: prepay 40-50% of the surplus, invest the rest. You get partial debt reduction, partial equity exposure, and you sleep better.