Home & Property · 9 min read
Home loan prepayment vs SIP: where should your bonus go?
Got a bonus and a home loan? The choice between prepaying and investing is part maths, part temperament. Here is the honest framework for deciding.
Krish Dalal
Founder and editor, PaisaExpert. Master's in Business Management, SP Jain School of Global Management, London. · Last updated 2026-06-10
It is bonus season, or a windfall has landed, and you have a home loan running. Every WhatsApp uncle has an opinion. One swears by becoming debt-free as fast as possible. Another says never prepay cheap home-loan debt while equities compound faster. They are both half right, because the answer depends on two things they usually ignore: your actual after-tax numbers, and your temperament.
The real comparison is after-tax, not headline
People compare the loan's headline rate to the market's headline return, and both numbers are wrong once tax enters. On the loan side, if you are on the old regime, Section 24(b) lets you deduct up to ₹2 lakh of home-loan interest a year, which lowers the effective cost of the loan. On the investment side, equity gains are taxed too: long-term capital gains on equity above ₹1.25 lakh a year are taxed at 12.5 percent, which trims your real return. Compare the honest, after-tax versions of both, not the brochure numbers.
| Prepay the loan | Invest in a SIP | |
|---|---|---|
| You earn / save | Your loan interest rate (guaranteed) | Market return (uncertain) |
| Typical number | Around 8 to 9 percent | Around 12 percent long-run, not guaranteed |
| After tax | Slightly lower if you claim 24(b) | Slightly lower after LTCG tax |
| Risk | Zero, the saving is certain | Market risk, can fall for years |
| Liquidity | Money is gone into the house | Can be redeemed if needed |
| Emotional payoff | High, debt shrinks visibly | Lower, gratification is delayed |
When prepaying clearly wins
- Your loan rate is high. If your home loan is above 9.5 to 10 percent (older loans, or after rate rises), the guaranteed saving from prepaying beats the uncertain return from investing for most people.
- You are early in the loan. In the first few years of an EMI, almost all of it is interest. A prepayment now removes years of future interest, far more than the same prepayment later. The earlier the prepayment, the bigger the win.
- You are on the new regime, so you get no 24(b) interest deduction, which makes the loan's effective cost its full headline rate.
- Debt genuinely stresses you. If the loan keeps you up at night, the guaranteed return plus the peace of being debt-free is worth more than a few extra percent of expected market return you might not emotionally survive a crash to collect.
When investing clearly wins
- Your loan rate is low. A loan around 8 to 8.5 percent, especially with the 24(b) tax shield, has a low effective cost that a long-run equity SIP has historically beaten.
- Your horizon is long. The longer your money stays invested, the more reliably equity has outperformed a home-loan rate. With 15-plus years ahead, the odds favour investing.
- You are disciplined and can stay invested through a 30 or 40 percent market fall without selling. The maths only works if you actually hold.
- You are late in the loan tenure. In the final years, most of your EMI is principal, so prepaying saves relatively little interest, and investing the money usually does more.
The split: why many people should do both
The framework above makes it sound binary. In practice, the best answer for many borrowers is to split the bonus, because it hedges the one thing nobody can predict, which is the future. Consider Rahul, who gets a ₹3 lakh bonus and a home loan at 8.6 percent. He puts ₹1.5 lakh into prepayment, which knocks a chunk of guaranteed interest and years off his tenure, and ₹1.5 lakh into his equity SIP for the long-run upside. He gets the certain win and the probable win, sleeps fine either way, and does not have to be right about the market to feel good about the decision.
Frequently asked
What to do next
- Confirm the foundation first: three to six months of expenses in an emergency fund, plus adequate term and health insurance. Only then deploy the bonus.
- Find your loan's exact interest rate and whether you are early or late in the tenure.
- Run the prepayment calculator to see the guaranteed interest and tenure saved, then the SIP calculator for the same amount and horizon.
- If your loan rate is high or you are early in the tenure or debt stresses you, lean towards prepaying. If your rate is low and your horizon is long and you can hold through falls, lean towards investing.
- When in doubt, split the bonus and do both, and always choose 'reduce tenure' on any prepayment.