No home loan deductions in new tax regime: Why prepayment makes sense & how it can help you save on interest outgo

Time of India

4 hours ago

Home loan tax benefits
: With key tax incentives not available under the new income tax regime, many loan borrowers are reassessing home loan repayment strategies. Many borrowers are now favouring early prepayments to cut interest outgo and loan tenure.
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The old tax regime allows borrowers to claim deductions of Rs 2 lakh on interest under Section 24(b) and Rs 1.5 lakh on principal under Section 80C. The new income tax regime doesn't have these benefits, reducing the incentive to maintain long-term loans.
'While earlier tax deductions justified holding on to loans, the new tax structure weakens that logic as the cost has gone up,' said Amar Ranu, Head–Investment Product & Insights at Anand Rathi Shares and Stock Brokers, according to an ET report.
Benefits of prepaying home loans
Prepaying a home loan, especially in the early years, significantly reduces interest payments because EMIs are front-loaded—meaning most of the initial outgo covers interest.
For instance, on a Rs 50 lakh loan at 8.5% for 20 years, borrowers would pay over Rs 48 lakh in interest. A Rs 5 lakh prepayment in the third year could shorten the tenure by 3–4 years and save up to Rs 12 lakh in interest, according to the ET analysis.
When lump sum prepayments are not feasible, increasing EMIs gradually as income rises is an effective alternative.
A 10% annual EMI increase can cut the loan term to under 10 years, while a 5% rise can bring it down to 12–13 years.
Annual Increase in EMI Interest Saved (Rs lakh) EMIs Saved 5% 16.1 80 10% 22.2 109 15% 25.6 125 20% 27.9 136
Source: ET report
A dual strategy of periodic prepayments and stepped-up EMIs yields maximum savings. This disciplined approach doesn't necessarily demand big sacrifices. Redirecting bonuses, maturing fixed deposits, life insurance proceeds, or funds from low-yield assets can help build a prepayment pool.
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'Prepaying 5% of the loan every year is a sensible and manageable target,' said Ranu.
While early repayment yields the most savings, it becomes less effective in later stages of the loan. Borrowers in the final years may be better off continuing with the loan—particularly if the interest rate is low or they have access to investments offering higher returns.
'Prepaying your loan is like saving money at the same rate as your loan interest.
So, if your home loan rate is 8.5%, every rupee you prepay helps you avoid paying 8.5% interest on it, which is as good as getting a risk-free return of 8.5%,' said Vipul Patel, Founder of mortgage-world.in, in the ET report.
Experts also advise checking for hidden charges before prepaying, maintaining adequate emergency funds, and ensuring liquidity before committing excess cash to loan repayment. While markets may offer higher returns, prepayment guarantees fixed savings and peace of mind.