Prepay vs Invest

Friend asked over coffee whether to prepay his home loan or invest the same five lakh instead. The instinct from every fund app he opens says invest. The instinct from his father says prepay. Pulled out a napkin.

The right answer depends on one line of his ITR most people never read.

The napkin has four rows.

Row one is the loan rate. 8.5 pct floating on the statement. The number everyone quotes when they have this conversation.

Row two is the Section 24 status. Self occupied past the 2 lakh interest cap loses the marginal tax shield. Under construction or let out keeps the full deduction. New regime gives up the deduction entirely. One line on the ITR, and the same loan becomes a cheap loan or an expensive one.

Row three is the post tax loan cost. Full deduction in a 30 pct bracket shaves 255 basis points off. So the brochure 8.5 pct becomes a true 5.95 pct in Case A. Capped or new regime keeps the whole 8.5 pct in Case B. Same EMI, two different math problems.

Row four is the equity number stripped the same way. 12 pct long run nominal is the headline. Strip 12.5 pct LTCG on gains past the 1.25 lakh annual exemption and the honest expected is closer to 10.8 pct.

The decision sits in the gap between row three and row four. Above 4 percentage points, the equity premium pays for the variance. Below 4, you are giving up certainty for a margin that does not exist.

Then there is the part the spreadsheet misses. The EMI you "would have invested" rarely lands in the SIP every month for fifteen years. Prepayment locks the alpha in. Investing rents it back from your future self every thirty days.

The math says invest. The behaviour says prepay. Both can be true, and your ITR decides which