Prepay the home loan or keep the cash in a deposit after the October 2026 hike: the arithmetic

Rules and rates as of 12 October 2026.

On 7 October 2026 the Reserve Bank's Monetary Policy Committee raised the repo rate by 25 basis points to 5.50%. If your home loan is a floating-rate loan linked to an external benchmark, your lender will pass on some or all of that at the next reset. Many borrowers with a bonus, a maturing deposit or a property sale in hand are now weighing one question: put a lump sum into the loan, or keep it in a fixed deposit? This piece does not answer that for you. It lays out the arithmetic so you can run it on your own numbers.

The one comparison that matters

Every rupee you prepay earns a guaranteed, tax-free return equal to your loan rate, because it is interest you no longer pay. Every rupee you keep in a deposit earns the deposit rate minus the tax on it. So the comparison is:

• Cost of the loan, after tax: your loan rate, reduced only if the extra interest you would pay actually lowers your tax bill.
• Return on the alternative, after tax: the expected return, minus tax at your slab. For a deposit taxed at 30% plus 4% cess, that is the deposit rate times 0.688.

Whichever number is higher tells you which use of the rupee is cheaper or richer, before you weigh liquidity and risk. A deposit's return is known; a market-linked return is not, and comparing a guaranteed loan saving with a hoped-for equity return is comparing different things.

Does the tax deduction change the loan rate?

Under the Income-tax Act, 2025, interest on a loan taken to buy or build a house is deductible under section 22(1)(b). For a house that is your own residence (annual value nil under section 21(6)), section 22(2) caps the deduction at ₹2 lakh a year, provided the purchase or construction is completed within five years from the end of the tax year in which the money was borrowed; otherwise the cap is ₹30,000.

Two things shrink the value of this deduction for the prepay-or-not question:

• The new regime does not allow it. Section 202, the default regime, computes income without the section 22(1)(b) deduction for a self-occupied house. If you are on the default regime, your post-tax loan rate is simply the loan rate.
• The cap may already be used up. Under the old regime, if your yearly interest is above ₹2 lakh, the extra interest you would avoid by prepaying was never giving you a deduction. On that slice your effective cost is the full loan rate. The deduction only lowers your effective rate once yearly interest falls below ₹2 lakh, and then the effective rate is roughly the loan rate times (1 minus your tax rate).

Can the lender charge you for prepaying?

For floating-rate loans to individuals, generally no. The RBI's Pre-payment Charges on Loans Directions, 2025 (2 July 2025) bar regulated lenders, including NBFCs, from levying pre-payment charges on floating-rate loans to individuals for non-business purposes, whether you prepay in part or in full, whatever the source of funds, and with no minimum lock-in. They apply to loans sanctioned or renewed on or after 1 January 2026. For older bank loans, an RBI circular of 7 May 2014 had already stopped scheduled commercial banks from charging foreclosure or pre-payment penalties on floating-rate term loans to individual borrowers. If your loan is fixed-rate, or from a housing finance company and sanctioned before 2026, read your sanction letter.

The RBI's 18 August 2023 circular on resetting floating rates also requires lenders to let you choose, at a reset, between a higher EMI, a longer tenure or a mix, and to let you prepay in part or in full at any point. It says a tenure extension must not cause negative amortisation.

A worked example

These figures are illustrative, not quotes from any lender. Outstanding loan: ₹40 lakh. Remaining tenure: 15 years (180 months). Rate after the hike: 7.75% a year, floating. Lump sum available: ₹5 lakh. The EMI formula is P × r × (1+r)ⁿ ÷ ((1+r)ⁿ − 1), with r the monthly rate (7.75% ÷ 12) and n the months left. That gives an EMI of ₹37,651.

Option A, prepay and keep the EMI. The balance drops to ₹35 lakh. At the same EMI, the loan closes in 143 months instead of 180, so 37 months sooner. Total interest over the remaining life falls from about ₹27.77 lakh to about ₹18.64 lakh, a saving of about ₹9.13 lakh.

Option B, keep ₹5 lakh in a deposit. Assume 7% a year, taxed at 30% plus 4% cess (31.2%). The post-tax yield is 4.82%. Kept for 15 years with post-tax interest reinvested, ₹5 lakh grows to about ₹10.12 lakh.

To compare like with like, picture both borrowers at month 180. In Option A, the borrower whose loan closed at month 143 puts the freed EMI into the same 4.82% deposit for the remaining months. That pot is about ₹15.19 lakh at month 180. In Option B, the deposit is about ₹10.12 lakh and the loan has just closed.

Item	A: prepay ₹5 lakh	B: ₹5 lakh in deposit
Loan closes in	143 months	180 months
Interest paid on the loan	₹18.64 lakh	₹27.77 lakh
Year-1 loan interest	₹2.65 lakh	₹3.05 lakh
Year-1 deposit interest after tax	nil	₹24,080
Cash at month 180 (new regime)	₹15.19 lakh	₹10.12 lakh
Old regime: value of section 22 deductions at month 180, reinvested	₹8.55 lakh	₹10.98 lakh
Cash at month 180 (old regime)	₹23.74 lakh	₹21.10 lakh

Read the year-1 rows first: prepaying cuts ₹40,156 of interest in the first year, while the deposit pays ₹24,080 after tax. Over the full term, on these assumptions, Option A leaves about ₹5.07 lakh more under the new regime. Under the old regime, Option A gives up some deductions: the loan without prepayment has yearly interest above ₹2 lakh for seven years, the prepaid one for four. That narrows the gap to about ₹2.64 lakh, but does not close it.

The break-even: for the deposit to match, it would need to earn about 8.0% a year after tax (7.75% compounded monthly, stated as an annual rate), or about 11.7% before tax at a 31.2% rate. Change the rate, the slab or the tenure and that number moves, which is the point of doing the sum yourself.

What the arithmetic leaves out

• Money prepaid cannot be taken back. If you lose income or face a medical bill, a top-up loan or personal loan may cost more than your home loan, if you get one at all. Decide how many months of expenses and EMIs you want to keep liquid before counting any money as spare.
• Rates move both ways. The example holds 7.75% for 15 years. A floating rate will not stay put, and neither will deposit rates.
• EMI or tenure. Keeping the EMI and cutting the tenure saves more interest. Lowering the EMI instead improves monthly cash flow. Ask the lender which they apply by default.
• Your full tax position. Whether the old regime is better for you depends on all your deductions, not just home-loan interest. A chartered accountant can run both.