Tax implication

However in the bargain of saving by prepaying the home loan, one should not forget the tax implication of prepaying the home loan. Tax deduction benefits are available on a home loan to the tune of Rs 1 Lakh for the principal amount, under Section 80C, and Rs 1.5 Lakh for the interest paid on the loan, under Section 24. Once the loan is prepaid, there are no tax deductions available on the home loan. However tax deductions are available on prepayment charges paid for the home loan. So make sure the tax benefit on prepayment charge along with the interest saved is always more than the prepayment penalty and loss in tax deductions on the home loan.

Hence under most circumstances it is better to prepay the loan if you can afford to make large payment but it is advisable to prepay after you have set aside enough money for emergencies. Also ensure that it is cheaper to do prepay the loan than to serve its tenure factoring in the prepayment penalty and other fee incurred. Above all the prepayment of home loan not only reduces your financial burden but also enables you to retain the complete ownership of the house earlier than planned, thereby reducing the psychological pressure.