Take a loan at a floating interest rate as an individual for a personal purpose, such as a home loan or a floating-rate personal loan, and no bank or NBFC can charge you for prepaying it. That holds whether you pay off part of it or close it fully. Business loans and fixed-rate loans are where foreclosure charges can still apply, and even there RBI now limits how the charge is worked out. The answer turns on four facts: the rate type on the day you prepay, the purpose of the loan, who the borrower is, and which kind of lender sanctioned it.
These rules were issued as the Reserve Bank of India (Pre-payment Charges on Loans) Directions, 2025 dated 2 July 2025, and they apply to loans sanctioned or renewed on or after 1 January 2026. RBI has since folded its customer-conduct rules into separate directions for each type of lender, issued on 28 November 2025. For NBFCs the same text now sits in paragraphs 33 and 34 of the Non-Banking Financial Companies – Responsible Business Conduct Directions, 2025. For banks, the current consolidated version is the Commercial Banks – Responsible Business Conduct Directions, 2025, shown on RBI's site as updated on 1 October 2026. The position below is as checked on 27 October 2026.
Four questions that decide whether a prepayment charge is allowed
- Is the loan on a floating rate when you prepay? A floating rate moves with an external benchmark or the lender's reference rate. Where the loan is fixed-rate on the prepayment date, the bans below do not apply and the lender's own policy governs the charge.
- What was the loan for? A loan for a purpose other than business, taken by an individual, gets complete protection on a floating rate. A business loan gets protection only if the borrower is an individual or a micro or small enterprise (MSE), and then only with certain lenders or below a size limit.
- Who borrowed? Individuals, with or without a co-obligant (a co-borrower or guarantor who shares the liability), are covered. For business loans, MSEs as defined under the Micro, Small and Medium Enterprises Development Act, 2006 are also covered. A medium enterprise or a large company is not.
- When was the loan sanctioned or last renewed? The 2025 directions apply to loans sanctioned or renewed on or after 1 January 2026. Older loans stay under the earlier instructions, which already barred foreclosure charges on floating-rate term loans to individuals for non-business purposes.
The protection holds whatever the source of the money (your savings, a bonus or a refinance from another lender), whether the prepayment is partial or full, and without any minimum lock-in period. A lender cannot insist that you wait six months or a year before prepaying a covered loan without charge.
Floating-rate business loans: it depends on the lender
For floating-rate loans taken for business by individuals and MSEs, RBI drew the line by lender. The larger lenders cannot charge at all. A second set cannot charge where the sanctioned amount or limit is up to ₹50 lakh. Every other lender follows its board-approved policy.
| Lender | Floating-rate loan to an individual, non-business purpose | Floating-rate business loan to an individual or MSE |
|---|---|---|
| Commercial banks (other than small finance banks, regional rural banks and local area banks), Tier 4 urban co-operative banks, NBFCs in the Upper Layer, All India Financial Institutions | No prepayment charge | No prepayment charge, whatever the loan size |
| Small finance banks, regional rural banks, Tier 3 urban co-operative banks, State and Central co-operative banks, NBFCs in the Middle Layer | No prepayment charge | No charge if the sanctioned amount or limit is up to ₹50 lakh; above that, lender's policy |
| Other lenders covered by the directions (for example, NBFCs in the Base Layer) | No prepayment charge | Lender's approved policy, subject to the limits on how the charge is computed |
Two points trip people up. The ₹50 lakh test looks at the sanctioned amount or limit, not the balance outstanding when you prepay. A ₹70 lakh term loan from a small finance bank stays outside the ban even after it has been paid down to ₹20 lakh. Second, the MSE status must hold under the MSMED Act definition, so a proprietor whose business has grown into a medium enterprise loses the business-loan protection, though a personal floating-rate home loan in the same name stays fully protected.
Fixed-rate and dual-rate loans
A car loan, personal loan or gold loan on a fixed rate can carry a prepayment charge as per the lender's approved policy. RBI has, however, fixed the base: for a term loan, the charge must be calculated on the amount being prepaid, not on the original loan or the full outstanding balance.
Dual-rate or special-rate loans (fixed for an initial period, floating after that, or the reverse) are tested on the day you prepay. A loan that is on a floating rate on that day gets the floating-rate rules in full. A home loan fixed for its first three years and floating afterwards can therefore carry a charge if you close it in year two, and none if you close it in year four.
Cash credit and overdraft accounts
Working capital facilities work differently because there is no fixed instalment schedule. If such a facility falls outside the bans above, a charge for closing it before its due date can be levied only on an amount not exceeding the sanctioned limit. If you tell the lender, within the period stated in the loan agreement, that you do not want the facility renewed, and the account is then closed on its due date, no prepayment charge applies at all. Note the notice period in the sanction letter on the day you sign it, because a late intimation takes you out of this exemption.
Charges the lender cannot spring on you
- Undisclosed charges. Whether a prepayment charge applies must be stated in the sanction letter and the loan agreement, and in the Key Facts Statement where one is required. A charge not disclosed this way cannot be levied. This sits alongside RBI's Key Facts Statement circular of 15 April 2024. It applies to retail and MSME term loans sanctioned on or after 1 October 2024, and fees not mentioned in the KFS cannot be charged without the borrower's explicit consent.
- Lender-initiated prepayment. Where the bank or NBFC itself asks you to repay early, for example by recalling the loan or pushing you to close it, it cannot charge for that prepayment.
- Revived waivers. A charge the lender waived earlier cannot be levied retrospectively when you finally prepay.
Worked examples with 2026 sanctions
The figures below are illustrations, assuming each loan was sanctioned after 1 January 2026 and that the lender's disclosed policy charge is the rate shown.
Home loan prepaid from a bonus
Ritu has a floating-rate home loan of ₹45 lakh from a small finance bank, sanctioned in February 2026. In March 2027 she prepays ₹5,00,000 from her bonus. The charge is nil. It is a non-business floating-rate loan to an individual, so the lender type and the loan size do not matter, and no lock-in applies.
MSE term loan above ₹50 lakh
A proprietorship registered as a small enterprise has a floating-rate term loan with a sanctioned amount of ₹80 lakh from a small finance bank, and its disclosed policy is 2% of the amount prepaid. It prepays ₹30,00,000. Because the sanction exceeds ₹50 lakh, the bank may charge: 2% of ₹30,00,000 is ₹60,000. Had the same loan come from a large commercial bank, the charge would be nil, since those banks cannot levy any charge on floating-rate business loans to individuals and MSEs.
Fixed-rate car loan
A salaried borrower prepays ₹4,50,000 on a fixed-rate car loan. The KFS states a 3% prepayment charge. The maximum the lender can collect is 3% of ₹4,50,000, or ₹13,500, worked on the amount prepaid. Had the KFS been silent on prepayment charges, nothing could be charged.
Closing a cash credit limit early
A trading firm (a medium enterprise, so outside the MSE protection) closes a ₹40 lakh cash credit limit two months before the renewal date. Its utilisation that day is ₹25 lakh and the disclosed charge is 1%. The charge cannot be computed on more than the ₹40 lakh limit, so the ceiling is ₹40,000. Had the firm given notice of non-renewal within the agreed period and let the limit lapse on its due date, the charge would be nil.
Loans sanctioned before 1 January 2026
The 2025 directions do not reach back into existing contracts. For a loan sanctioned or renewed on or before 31 December 2025, the earlier RBI instructions continue: no foreclosure charge on floating-rate term loans to individual borrowers for non-business purposes, with or without co-obligants. Business loans from that period, and all fixed-rate loans, follow the contract.
The change point is renewal. A cash credit limit renewed in April 2026 is a facility renewed after 1 January 2026, so the new rules apply to it from that renewal. When you refinance an older business loan, check whether the new lender is issuing a fresh sanction. If it is, the new loan is judged under the 2026 rules. Any charge on closing the old loan still depends on the old lender's terms.
Before you prepay: checks and what to do if charged wrongly
- Pull out the sanction letter, loan agreement and KFS and note the rate type, the purpose recorded, the sanctioned amount and the prepayment clause.
- Ask the lender for a written foreclosure statement before you pay. It should show the outstanding principal, interest to date and any charge separately.
- If a charge appears on a loan the rules protect, or one that was never disclosed, write to the lender's grievance redressal officer and quote the RBI direction and the date of sanction.
- Where the lender rejects the complaint or leaves it unresolved, escalate it to the RBI Ombudsman with copies of the sanction letter, KFS, foreclosure statement and your correspondence.
If the loan is from an NBFC, also ask which layer it falls in under RBI's scale-based regulation (Base, Middle or Upper). That single fact decides whether a floating-rate business loan to an MSE can carry a prepayment charge at all, and whether the ₹50 lakh test comes into play.
