Financial Dilemma of a salary increment? Increase your EMI’s or invest elsewhere

• by Vaibhav
• Updated: June 30th, 2025

When you get a salary increment, should you plan to finish your existing home loan early by increasing your EMI? Or should you invest the additional income elsewhere? Which is more beneficial? A comparison might help.

Most people in our country, when they get a salary hike, neither think of closing their home loan early nor about making new investments. What do they do then? They increase their expenses.

When individuals receive a salary increase, many tend to indulge in discretionary spending. They might invest in new furniture, purchase the latest smartphone, or seek out luxury experiences. Some even upgrade to significantly more expensive rental accommodations—for instance, moving from a ₹10,000 apartment to the one that costs ₹20,000. In certain cases, this financial uplift prompts displays of affluence, such as increased travel or leisure activities, driven by the sentiment: “I’ve received a raise, so I deserve to enjoy more.” This pattern is quite common.

So the real discussion is between two mindsets:

1) Finish off the home loan early, or

2) Invest the extra money wisely.

And then there’s a third category—people who do neither. This third category is the biggest. They stay confused between the two.

Investment is always the better option. Why? Let’s look into it.
 

1. Opportunity Cost of Capital

Let’s say you have a home loan of ₹40 lakhs at 8% annual interest (you can adjust this based on your actual loan). Let’s assume a 20-year tenure. The EMI here comes out to be around ₹33,458.

Now suppose your salary increases by ₹15,000/month.

And let’s say mutual funds give a 12% annual return in the long term.

So should you use the ₹15,000 to pay off your loan early (by increasing EMI)? Or invest it in mutual funds? Let’s find out.

Scenario 1: Pay off the loan faster

Add ₹15,000 to your EMI of ₹33,000, making it ₹48,000. Your loan is still ₹40 lakhs.

In this case, total interest paid drops to ₹18 lakhs. The total amount paid to the bank becomes ₹58 lakhs instead of ₹80 lakhs. That’s a saving of ₹22 lakhs.

Also, your loan gets closed in 10 years instead of 20 years.

Now that your loan is over in 10 years, you can start investing that ₹48,000 monthly EMI into SIPs (Systematic Investment Plans) for the next 10 years.

Assuming a 12% return, that monthly investment of ₹48,000 for 10 years will grow to about ₹1.07 crore. Add the ₹22 lakh you saved from early loan closure, and your total becomes ₹1.29 crore.

Scenario 2: Invest the ₹15,000 from Day 1

If instead of increasing your EMI, you start investing the ₹15,000 monthly for 20 years at 12%, you get about ₹1.37 crore.

At 15% returns (possible in mutual funds), this increases by another ₹8.5 lakhs or so.

Conclusion from Comparison:

Investing the extra ₹15,000 monthly yields better long-term returns than paying off the home loan early.
 

2. Tax Benefits:

Home loans give you tax benefits that you lose if you close the loan early:

• Under Section 80C, you get a deduction of up to ₹1.5 lakh on principal repayment.
• Under Section 24(b), you get up to ₹2 lakh deduction on interest paid.

That’s ₹3.5 lakh annual tax benefit. If you close your loan 10 years early, you lose ₹35 lakhs in deductions over those 10 years. Assuming you're in the 30% tax bracket, that’s about ₹10.5 lakhs in lost tax savings.

3. Avoiding New Loans:

As long as a home loan is ongoing, people tend to avoid new loans or unnecessary expenses. It keeps spending in check. But once you’re loan-free, many tend to take on new loans—say for a car, a vacation, etc. So an ongoing home loan acts as a check on impulsive financial decisions.

4. Home Loan is the Cheapest Loan:

A home loan at 8% is far cheaper than personal loans or credit card debt. And if you're earning 12% returns elsewhere, the 4% spread is in your favor. That’s why it's better to let the home loan continue while you invest the extra money.

5. Protection from Lifestyle Inflation:

When people get a raise, they start spending more. Luxuries become necessities. They fall into a cycle of always needing more. A home loan, with its regular EMI, helps enforce financial discipline and keeps that lifestyle inflation in check.

6. Liquidity:

If you invest in SIPs, you can withdraw the money in case of emergency. But if you increase your EMI, that extra money is locked in with the bank. If something urgent comes up, you'll have no option but to take an expensive personal loan or use a credit card.

7. Motivation:

Having a loan acts as a motivator. People work harder, stay focused, and maintain financial discipline. Once they're debt-free, they tend to relax or reduce their productivity. A manageable loan can actually push you to stay productive and financially sharp.

Final Conclusion:

Paying off home loan early seems beneficial, but investing the surplus income is smarter in the long run—both financially and strategically. It gives higher returns, better liquidity, tax benefits, and financial discipline.

So unless you're under immense psychological pressure from having debt, the better approach is: Keep the home loan. Invest the extra money."