₹1 Lakh Diwali Bonus Use: Your Diwali bonus can be useful for more than shopping and holidays. If you’ve received ₹1 lakh, you can use it to reduce your home loan or invest it in mutual funds. Both options can help your finances, but the benefits are different.
For someone paying 8.5% interest on a home loan, repaying the loan gives a sure saving on interest. Mutual funds can give better returns over time but they also carry market risks.
Aditya Agarwal, co-founder of Wealthy.in, says “Prepaying a home loan at 8.5 per cent is like earning a guaranteed 8.5 per cent a year, with no market risk. Equity funds can potentially earn more over long periods, but without any guarantee.”
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₹1 Lakh Diwali Bonus: Home Loan vs Mutual Funds
If you invest ₹1 lakh in an equity mutual fund, the amount could grow differently depending on its yearly returns.
At an assumed 10% annual return, ₹1 lakh could become around ₹1.61 lakh in 5 years, ₹2.55 lakh in 10 years and ₹3.93 lakh in 15 years.
If returns reach 12%, the amount could grow to ₹1.76 lakh, ₹3 lakh and ₹5.07 lakh over the same periods.
These figures include long-term capital gains tax at 12.5% on gains above ₹1.25 lakh and 4% cess. But mutual fund returns aren’t fixed and can also be negative.
On the other hand, using ₹1 lakh to repay a home loan at 8.5% could give an equivalent benefit of around ₹1.50 lakh in 5 years, ₹2.26 lakh in 10 years and ₹3.40 lakh in 15 years.
Agarwal says, “Over 15 years, Rs 1 lakh in an equity fund could grow to roughly Rs 3.9-5.1 lakh after tax at assumed returns of 10-12 per cent a year, against an effective Rs 3.4 lakh from prepaying. Over five years, though, the difference is small, and a single bad year can wipe it out,”
Borrowers can also divide the bonus between loan repayment and mutual funds instead of choosing only one option.
How Much Interest Can You Save by Paying ₹1 Lakh?
Consider someone with a ₹40 lakh home loan and 20 years left to repay it. At 8.5% interest, the monthly EMI will be around ₹34,713. The total interest over the remaining period will be about ₹43.31 lakh.
According to Agarwal’s calculations, paying an extra ₹1 lakh while keeping the same EMI can reduce the loan period by around 14 months. It can also save about ₹4.18 lakh in interest.
If the borrower chooses to reduce the EMI instead, the monthly payment will fall by around ₹868. But the interest saving will be only about ₹1.08 lakh.
What Should Borrowers Consider Before Deciding?
Equity mutual funds need to earn around 8.5-8.8% before tax to match the home loan prepayment benefit. If the investor has already used the ₹1.25 lakh tax exemption, the required return could be around 9.2-9.5%.
Agarwal warns, “Prepayment is guaranteed; equity returns aren’t, and can be negative over a few years. Borrowers should expect equity to beat the loan rate by a clear margin before choosing it,”.
Tax rules also matter. Under the new tax regime, interest on a self-occupied home loan doesn’t qualify for a tax deduction. Under the old regime, eligible borrowers can claim up to ₹2 lakh per year.
The RBI also raised the repo rate to 5.50% on October 7, 2026. This could increase borrowing costs for floating-rate loan customers when banks pass on the change.
Professor Jayatu Sen Chaudhury of IMI Delhi says, “If lending rates rise, the cost of carrying the loan increases, strengthening the case for prepayment. Conversely, falling interest rates reduce the effective cost of borrowing and may make equity investment relatively more attractive,”.
Borrowers should first keep enough money for emergencies and clear any costly debt. Professor Chaudhury prefers home loan prepayment for someone paying 8.5% interest if they already have enough savings.
He says, “Ultimately, the decision is not simply about maximising returns. It is about balancing potential wealth creation against the certainty of reducing financial obligations,”.
