Taxes, inflation and comfort: Why it is absolutely necessary to stay debt-free

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₹2 lakh for interest with an additional ₹50,000 for loans less than ₹35 lakh. Thus, tax benefits are significant for loans less than ₹35 lakh. However, for larger home loans, the effective post-tax rate falls by only a small decimal and does not translate into any significant savings.

If you have a ₹2 crore, 20-year outstanding loan at 9 %, for a person in the 33 % tax bracket, the tax benefit is hardly .02% to 05% of the loan amount in the first few years. The stock markets will make better returns: In theory, on the basis of interest rates and expected investment returns, investors should be able to make a rational decision about investing versus loan repayments. In reality, investors cannot predict both interest rates and expected returns from equities.

My friend took a ₹2 crore housing loan to buy his dream home in 2021 as the rate offered was a mouth-watering 6.5 %. The EMIs (equated monthly installments) were a small stretch, as they always are, but stock markets were booming and he decided not to liquidate his equity investments and take the huge loan instead. We all know what happened towards the end of 2021.

In a matter of a few months, rates moved to 9 % and his EMIs increased by a whopping 20%. In the meanwhile, the stock market had started correcting. Understandably, he panicked, exited all the savings at the market bottom, and moved them to fixed deposits (FDs).

Having a huge mortgage to pay off makes you vulnerable. It will be mentally difficult to stay resilient during market falls. Secondly, there are too many variables in the investment thesis that can go wrong and against you in the short term—a long period of no performance, a massive crash, or an unprecedented rise in interest rates All this while you