Introduction

Home loans have long been considered a tax-efficient way to build wealth through real estate in India. With substantial tax benefits available under the old income tax regime, home loan repayments not only helped in asset creation but also significantly reduced the taxpayer’s liability. However, with the introduction and gradual normalization of the new income tax regime under Section 115BAC, many popular deductions have been removed, including those related to home loans. As of the Finance Act 2025, the new regime is now the default, and taxpayers must opt for the old regime manually if they wish to claim exemptions.

This shift has sparked a major rethink among borrowers. One of the most significant questions today is: if I can’t claim tax benefits, should I continue with a long home loan tenure, or should I prepay aggressively? In this article, we will explore in detail why prepaying your home loan under the new tax regime is not just a wise decision but a financially prudent one.

Understanding the Tax Changes and Their Impact on Home Loans

The Indian income tax system allows taxpayers to choose between the old regime (with deductions) and the new regime (lower slab rates without deductions). Here are some of the key deductions related to home loans that are no longer available under the new regime:

• Section 80C: Deduction of up to ₹1.5 lakh on principal repayment of home loan
• Section 24(b): Deduction of up to ₹2 lakh on interest paid for a self-occupied property
• Stamp duty and registration charges: Previously claimable under 80C within the ₹1.5 lakh limit

These deductions made home loans highly attractive from a tax planning point of view. Without these benefits, borrowers are now paying EMIs with no tax savings—turning the entire EMI (especially the interest portion) into a pure expense.

Why Prepaying Makes More Sense Now

With tax benefits gone, it becomes financially advantageous to pay off the loan faster. Here’s how and why prepaying your home loan helps in the new scenario:

1. Significant Interest Savings

Home loans are structured in a way that most of your EMI payments in the initial years go towards interest. If you prepay early in the loan tenure, you drastically reduce the principal amount on which interest is calculated. This leads to a significant reduction in total interest paid over the loan period.

2. Higher Effective Returns

Consider this: if your loan interest rate is 8.5%, prepaying the loan gives you a guaranteed, tax-free return of 8.5%—better than what most fixed deposits or traditional investment avenues offer post-tax. Therefore, using surplus funds to prepay can be more beneficial than parking money in low-return instruments.

3. Shortened Loan Tenure

Prepayments reduce either your EMI or your loan tenure. If you choose to keep your EMI constant, your loan tenure reduces, and you can become debt-free faster. This gives you mental peace and improves your cash flow for future financial goals.

4. Improved Credit Profile

Regular prepayments indicate sound financial discipline and positively impact your credit score. A higher CIBIL score can help you negotiate lower interest rates on future loans and credit cards.

5. Financial Flexibility

Once your home loan is closed, the EMI amount becomes surplus in your monthly budget. This can be redirected towards investments, retirement planning, education, or business ventures—giving you greater financial flexibility and freedom.

Example: How Much Can You Save?

Let’s consider a practical example to understand how much interest you can save by prepaying:

As seen above, a simple prepayment strategy can save you more than ₹10 lakh in total interest and reduce your tenure by several years.

Tips for Effective Home Loan Prepayment

Prepaying doesn’t always require huge lump sums. Here are smart ways to incorporate prepayment into your budget:

• Start Early: The earlier you begin, the more you save due to the nature of interest compounding.
• Use Annual Bonuses: Allocate part of your yearly bonus or performance incentives toward prepayment.
• Systematic Prepayment: Even paying ₹3,000–₹5,000 extra every month can reduce your loan tenure significantly.
• Round Up Your EMI: If your EMI is ₹25,734, round it up to ₹26,000 or ₹27,000 to add an automated prepayment element.
• Review Bank Charges: Check if your bank levies any penalty for prepayment. Most banks waive it off for floating-rate loans.

Is Old Tax Regime Still Worth It for Home Loan Benefits?

While the new regime is now the default, some salaried individuals can still benefit from the old regime if their deductions are high. You should consider staying in the old regime if:

• You claim full 80C deductions (LIC, PF, ELSS, principal repayment)
• You are eligible for Section 24(b) deduction on interest
• You pay medical insurance premiums under Section 80D

If your total deductions exceed ₹3.5 lakh, compare tax liabilities under both regimes before switching. A qualified CMA or tax advisor can assist in accurate calculations.

Frequently Asked Questions (FAQs)

Q1. Is there any penalty for prepaying a home loan?

For floating-rate loans, RBI guidelines prohibit banks from charging prepayment penalties. For fixed-rate loans, a small penalty may apply, usually around 1%–2%.

Q2. Can I make part-payments anytime?

Yes. Most lenders allow multiple part-payments in a year, subject to a minimum amount (e.g., ₹10,000). Always check with your bank’s policy.

Q3. Should I invest or prepay my loan?

If your expected returns from investment avenues are lower than your loan interest rate, prepaying is a better option. If you can get assured returns of over 10% post-tax, investing may work better.

Q4. Will my EMI reduce if I make a part-payment?

You have two options: either reduce your EMI or reduce your tenure. Opting for tenure reduction results in more interest savings over time.

Q5. Does prepayment improve my credit score?

Yes. Prepayments and early closures reflect positively on your credit profile, often resulting in better loan terms in the future.

Conclusion

With the removal of key tax deductions for home loans under the new income tax regime, it is no longer financially sensible to hold on to a long-tenure loan purely for tax purposes. In this new scenario, prepaying your home loan can lead to substantial savings in interest, faster loan closure, and improved financial health. Even small regular prepayments add up over time and bring you closer to a debt-free life.

If you’re a salaried individual or a self-employed taxpayer under the new tax regime, it’s time to re-strategize your home loan plan. Use surplus income wisely, track your EMI schedule, and prepay whenever possible. It’s a financially smart move that pays off in peace of mind and long-term wealth creation.