Should I pay off my mortgage or should I invest ?

This is one question that leaves many in a quandary. Should I pay off my debt or should I invest? There is no rocket science involved in the answer. It is as simple as this: If you can earn a higher after-tax return on your investments than the after-tax interest rate expense on your debt, you should invest. Otherwise, you should pay off your debt.

Let us, for the sake of simplicity split the above mentioned answer into two variables and take up each of these separately. The first variable involved is the rate of after-tax interest you are paying on your debt and the second variable is the after-tax rate of return you expect to earn on your investments.

Debts form a continuum. On one end of the spectrum is high-interest credit card debt; while on the other is the low cost housing loan. The former is the deadliest, least productive and should be avoided unless absolutely necessary. The latter, however, is the lower interest variety and is partially or wholly tax-deductible, making it even more attractive. If you pay off your mortgage, you'll lose the mortgage deduction on your income taxes. That lowers your overall return from repaying the mortgage.

Taxes also lower the return from investments. However, there are investments, the returns of which are tax free. The best example is the public provident fund (PPF) wherein you can invest up to seventy thousand rupees an year and earn an eight percent tax free rate of return.

To top it all, this investment is deductible from your gross earnings for the purpose of calculation of tax. With regard to other investments, one must remember that the effective rate of return on them can be 70% (assuming you are in the 30% tax slab) of the return they claim.

To quite an extent, timing is critical. If you're close to retirement, the mortgage is near its end, and the investment options available are low-yielding it is wiser to pay off the debt.

Ultimately, the decision has to be taken considering your bottom line. The eventual objective should be to have no obligation and a plethora of rewarding investments.