Got a bonus, a maturing FD or some savings, and want to put it into your home loan? It can be a good move. But your bank will ask one question: should the money cut your EMI or cut your tenure? The answer can change your total interest by lakhs. This guide shows the maths with a real example, explains the RBI rules on charges, and covers the tax angle under the old and new tax regimes.
What does prepaying a home loan mean?
Your EMI (equated monthly instalment) is the fixed amount you pay every month. Part of it is interest. The rest repays the loan amount, called the principal.
A part-prepayment is an extra lump sum you pay on top of your EMIs. All of it goes towards the principal. A foreclosure is when you repay the whole loan early and close it.
After a part-prepayment, your outstanding principal falls. The lender then does one of two things:
- Keep the EMI the same and shorten the tenure (you finish the loan earlier), or
- Keep the tenure the same and lower the EMI (you pay less each month).
Should you reduce EMI or tenure after prepaying?
Let us take one loan and try both options.
The loan: ₹40,00,000 outstanding, 8.50% a year, 20 years (240 months) left. You prepay ₹4,00,000 today.
The standard EMI formula is: EMI = P × r × (1 + r)^n ÷ [(1 + r)^n − 1], where P is the principal, r is the monthly rate (8.50% ÷ 12 = 0.7083%) and n is the number of months. For this loan, the EMI is ₹34,713. Over 240 months, you would pay ₹43,31,103 in interest if you never prepaid.
| After prepaying ₹4,00,000 | Monthly EMI | Months left | Total interest from today | Interest saved |
|---|---|---|---|---|
| No prepayment | ₹34,713 | 240 | ₹43,31,103 | — |
| Option A: keep EMI, cut tenure | ₹34,713 | 188 (last EMI ₹32,418) | ₹29,23,736 | ₹14,07,367 |
| Option B: keep tenure, cut EMI | ₹31,242 | 240 | ₹38,97,993 | ₹4,33,110 |
The same ₹4,00,000 saves about ₹14.07 lakh if you cut the tenure, but only about ₹4.33 lakh if you cut the EMI. With Option A, the loan ends about 52 months (4 years 4 months) sooner. With Option B, your EMI drops by ₹3,471 a month.
Why does cutting the tenure save so much more?
Interest is charged every month on the balance you still owe. In Option A, you keep paying the bigger EMI, so the balance falls faster every single month. Less balance means less interest, month after month.
In Option B, the lower EMI means you repay the balance at the old, slow pace. The loan still runs for 20 years, so interest keeps building for longer.
In simple words: each rupee you prepay saves interest for every month it stays off the loan. A shorter tenure keeps more rupees off the loan for longer.
When is reducing the EMI the better choice?
Cutting the tenure saves the most money, but it is not right for everyone. Lowering the EMI may suit you if:
- Your monthly budget is tight and a lower EMI gives you breathing room.
- Your income is irregular (for example, business or commission income).
- Your rate has gone up and the EMI now feels heavy.
- You want a bigger cushion for emergencies.
There is also a middle path. You can lower the EMI now and later pay extra whenever cash allows. Or you can keep the EMI the same and build a separate emergency fund before you prepay.
Will your bank charge you for prepaying?
For most home loans, no. Under the RBI (Pre-payment Charges on Loans) Directions, 2025 (check the latest directions), banks, NBFCs and other regulated lenders cannot levy pre-payment charges on floating-rate loans given to individuals for non-business purposes, with or without a co-borrower. A floating rate is one that moves with a benchmark, such as RBI's repo rate.
- These Directions apply to loans sanctioned or renewed on or after 1 January 2026.
- They apply to part and full prepayment, whatever the source of the money, with no minimum lock-in period.
- Older floating-rate home loans were already covered by earlier RBI rules that barred banks and NBFCs from charging foreclosure charges on floating-rate term loans to individual borrowers.
Fixed-rate loans are different. There, charges follow the lender's policy and must be disclosed in your sanction letter and loan agreement. Check your Key Facts Statement (KFS), the one-page summary of your loan's costs, before you pay.
How does prepaying affect your income tax?
From 1 April 2026, the Income-tax Act, 2025 replaced the 1961 Act. The old Act still governs tax years that began before 1 April 2026 (that is, FY 2025-26 returns). The ideas stay the same, but the section numbers changed.
| Benefit | Old tax regime | New tax regime (default) |
|---|---|---|
| Interest on a self-occupied home | Deduction up to ₹2,00,000 a year (Section 22 of the 2025 Act; earlier Section 24(b)) | Not allowed |
| Principal repaid | Counts within the ₹1,50,000 limit (Section 123 and Schedule XV of the 2025 Act; earlier Section 80C) | Not allowed |
If you use the new regime, there is no tax benefit on a self-occupied home loan to lose. Prepaying only saves interest.
If you use the old regime, check how much interest you pay in a year. In our example, first-year interest is about ₹3,36,946 without prepayment and about ₹3,01,590 after prepaying (Option A). Both are above the ₹2,00,000 cap. So the deduction stays at ₹2,00,000 either way, and the prepayment costs you no tax benefit this year.
The principal you repay, including a lump sum, may count towards the ₹1,50,000 limit. But that limit is shared with PF, PPF, life insurance and similar items, so many people fill it anyway. Schedule XV also says that if you sell the house within five years (as the schedule sets out), the principal deduction already claimed is taxed in the year of sale. Tax rules have conditions, so confirm your own case with a tax adviser.
Does the October 2026 repo rate hike change the answer?
The repo rate is the rate at which RBI lends to banks. On 7 October 2026, RBI's Monetary Policy Committee raised it by 0.25 percentage points to 5.50%.
Floating-rate home loans from banks are linked to an external benchmark lending rate (EBLR), often the repo rate. RBI's rules say this benchmark must be reset at least once every three months. So if your loan is repo-linked, your rate may go up at the next reset. When rates rise, your lender may raise the EMI, stretch the tenure, or both.
That makes prepaying, and choosing "cut tenure", more useful now. When your rate resets, RBI's 2023 rules on reset of floating rates on EMI loans (check the latest directions) say lenders must let you choose a higher EMI, a longer tenure, or both, and let you prepay in part or full at any time.
How do you make a part-prepayment the right way?
- Keep an emergency fund first. Money put into a loan is hard to get back.
- Check your KFS or sanction letter for any charges, especially if your loan is fixed-rate.
- Pay through net banking or at the branch, and mark it clearly as a part-prepayment, not an advance EMI.
- Tell the lender in writing whether you want a lower EMI or a shorter tenure. Lenders handle this differently, so do not assume.
- Ask for a revised repayment schedule and check that the principal has fallen by the full amount.
- Keep the receipt for your tax records if you use the old regime.
Do it in 10 minutes, free
Use the LowerMyEMI prepayment calculator. Enter your outstanding amount, rate, months left and the lump sum. It shows both options side by side, and you can export the result to Excel or PDF.
Before you prepay, it is also worth checking whether a lower rate is available. LowerMyEMI can write a ready email asking your own bank for a rate cut, and separate emails to other lenders asking for their balance transfer offer. You send them from your own email. We are not a lender and do not promise any rate; lenders decide.