I have deposited Rs 5 lakh in my bank account. Should I use it to repay my home loan or should I invest in equity? please suggest
The decision to prepay or not will depend on various factors. The key factor is whether you are able to earn more than the rate of interest you are paying on your home loan after considering the tax benefits available to you. Another factor that plays an important role is the psychological reasons for being debt free.
Lump sum investment in equities is not advised. If you want to invest in equities then you should do it through Systematic Transfer Plan (STP) where you put the lump sum money in a liquid fund and from there the money is invested in the scheme of your choice.
If you want to use the lump sum amount, you can use it to prepay the home loan instead of investing it in equity, even though the post-tax interest cost on the home loan is much less in your case. Any loan can be pre-paid in part or in full at any time. Some lenders may charge you a prepayment fee on the prepaid principal amount. Please assess the fund requirements in the near future before taking a final decision on prepayment of your home loan because if you need funds in future, you will not be able to borrow at the rate at which you get a home loan. So apart from the contingency needs, keep the fund requirement in the near future in mind while paying the home loan in excess of the regular EMI. Lastly, you should also consider the tax deduction benefits available on a home loan and the possibility of applying the same on returns over and above the interest cost after tax.
Balwant Jain is a tax and investment specialist and can be contacted on Twitter at jainbalwant@gmail.com and @jainbalwant.
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