Home loan prepayment: reduce EMI or tenure? Worked example with ₹5 lakh

If you make a part-prepayment on your home loan and can afford to keep the same EMI, choose to reduce the tenure: it saves far more interest than reducing the EMI. In an illustrative ₹50 lakh, 20-year loan at 8.5%, a ₹5 lakh prepayment after five years saves about ₹10.7 lakh of interest and three years of EMIs if you keep the EMI, but only about ₹3.9 lakh if you lower the EMI instead. Prepayment early in the loan is worth much more than the same amount late. On floating-rate home loans taken by individuals, RBI rules do not allow lenders to charge for prepayment.

This guide is part of the EMI calculation guide. Figures are illustrative and assume the rate stays constant.

The starting point

Loan: ₹50,00,000 at 8.5% for 20 years
EMI: about ₹43,391
After 5 years (60 EMIs), outstanding principal: about ₹44,06,359
Remaining EMIs if nothing changes: 180, totalling about ₹78,10,409

You pay ₹5,00,000 towards principal at that point, so the balance falls to about ₹39,06,359.

Option A: keep the EMI, reduce the tenure

At ₹43,391 a month on ₹39,06,359 at 8.5%, the loan is repaid in about 144 months instead of 180, which is roughly 36 months (3 years) sooner.

Remaining payments: about 143.8 × ₹43,391 ≈ ₹62,41,236
Payments avoided: ₹78,10,409 − ₹62,41,236 ≈ ₹15,69,173
Interest saved: ₹15,69,173 − ₹5,00,000 (your prepayment) ≈ ₹10,69,173

Option B: keep the tenure, reduce the EMI

Repaying ₹39,06,359 over the same 180 months gives a new EMI of about ₹38,467, which is ₹4,924 a month lower.

Remaining payments: 180 × ₹38,467 ≈ ₹69,24,143
Payments avoided: ₹78,10,409 − ₹69,24,143 ≈ ₹8,86,266
Interest saved: ₹8,86,266 − ₹5,00,000 ≈ ₹3,86,266

	Option A: reduce tenure	Option B: reduce EMI
Monthly EMI afterwards	₹43,391	₹38,467
Loan ends	About 3 years earlier	As originally planned
Interest saved	About ₹10.7 lakh	About ₹3.9 lakh
Best for	Borrowers who can keep paying the same EMI	Borrowers who need cash-flow relief

Option B still makes sense if your budget is tight, for example after a job change, because a lower EMI reduces the risk of missing payments. You can always prepay again later.

Timing: the same ₹5 lakh, five years versus fifteen years in

If you prepay ₹5 lakh after 15 years instead, when the balance is about ₹21,14,937, and keep the EMI:

The loan ends about 17 months early instead of 36
Interest saved: about ₹7,22,217 − ₹5,00,000 ≈ ₹2,22,217

Early in the loan, most of each EMI is interest on a large balance, so every rupee of principal you remove early stops interest from accruing for many more years.

Small, regular prepayments add up

You do not need a lump sum. On the same ₹50 lakh loan:

One extra EMI each year (₹43,391 every twelfth month): the loan ends in about 201 months and total interest falls from about ₹54.1 lakh to about ₹43.8 lakh.
Raising the EMI by 5% each year in line with salary increases: the loan ends in about 147 months, with total interest of about ₹34.6 lakh.

Ask your lender whether it accepts an increased EMI through a simple request, and whether there is a minimum part-prepayment amount.

Prepayment rules in India

Floating-rate loans to individuals for non-business purposes: RBI instructions do not allow banks, housing finance companies and other regulated lenders to levy prepayment or foreclosure charges, whether you prepay from your own funds or through a balance transfer. RBI's 2025 directions on prepayment charges restate and extend this for loans sanctioned or renewed from 1 January 2026; check the current text on the RBI website.
Fixed-rate loans: charges may apply if your agreement and Key Fact Statement say so.
Lender procedures: lenders may require a request in a set format, a minimum amount or limit the number of part-prepayments a year. These are operational rules, not fees.
Get it in writing: after prepaying, ask for a revised repayment schedule showing the new tenure or EMI.

Prepay or invest? A short decision test

Prepaying saves interest at your loan rate, with certainty. Investing earns an uncertain return, taxed in most cases. Ask:

Do I have an emergency fund? Keep six months of EMI and expenses in liquid savings first. Money prepaid cannot be easily withdrawn, unless your loan has an overdraft facility.
Is there costlier debt? Pay off credit card balances and personal loans first; their rates are usually much higher.
What is my after-tax return elsewhere? A fixed deposit at, for example, 7% taxed at 30% yields about 4.9%, well below an 8.5% loan rate.
Am I using the home loan tax deduction? Under the old regime, interest within the ₹2 lakh limit reduces tax, which lowers the effective loan rate. Above the cap, or under the new regime, there is no such offset. See home loan tax benefits.
Have I planned for big goals? Children's education or a known expense in a few years may need liquid money.

If the honest answer favours prepayment, Option A is usually the better default.

Frequently asked questions

Will the bank reduce my EMI or tenure by default?

It depends on the lender. Many reduce the tenure by default; some ask you. State your choice in writing when you pay.

Does prepayment affect my tax deduction?

Under the old regime it reduces future interest, so your deduction may fall below ₹2 lakh. The principal you prepay may count within the ₹1.5 lakh limit in that year. Run the numbers with a chartered accountant if tax is a big part of your decision.

Should I prepay or do a balance transfer?

They are not exclusive. A balance transfer reduces the rate; prepayment reduces the balance. Compare both with the balance transfer worked example.

Can I prepay an under-construction loan?

Usually yes, but check whether prepayments during the pre-EMI phase reduce the disbursed amount or are held. See pre-EMI vs full EMI.

Sources

Reserve Bank of India — instructions on prepayment and foreclosure charges
National Housing Bank — housing finance company supervision
Income Tax Department — deductions for principal and interest