How EMI Is Calculated: Formula, Example and Prepayment Tips
The EMI formula explained with a worked example (Rs 10 lakh at 8.5% for 20 years = Rs 8,678), how amortisation works, and how prepayment cuts your interest.
An EMI, or equated monthly instalment, is the fixed amount you pay every month to repay a loan with interest. It looks simple on a loan sanction letter, but the way it is split between interest and principal has a big effect on how much you really pay, and on how much you can save by prepaying. This guide explains the formula, works through a real example and shows what prepayment does.
Calculate yours: the free EMI Calculator shows your EMI, total interest and a full month-by-month amortisation schedule, with a chart.
The EMI formula
Banks in India use the standard reducing-balance formula:
EMI = P × r × (1 + r)n ÷ [(1 + r)n − 1]
- P = principal (loan amount)
- r = monthly interest rate = annual rate ÷ 12 ÷ 100
- n = number of monthly instalments = years × 12
"Reducing balance" means interest each month is charged only on the principal still outstanding, not on the original loan amount. That is why the same EMI pays mostly interest at the start and mostly principal at the end.
Worked example: ₹10 lakh at 8.5% for 20 years
- P = ₹10,00,000
- r = 8.5 ÷ 12 ÷ 100 = 0.0070833
- n = 20 × 12 = 240
- (1 + r)240 ≈ 5.4413
- EMI = 10,00,000 × 0.0070833 × 5.4413 ÷ (5.4413 − 1) ≈ ₹8,678
| Item | Amount |
|---|---|
| Monthly EMI | ₹8,678 |
| Total paid over 240 months | ≈ ₹20,82,776 |
| Total interest | ≈ ₹10,82,776 |
Over 20 years you pay slightly more in interest than you borrowed. That surprises many borrowers, and it is the main reason prepayment is so powerful.
How amortisation works
In month one, interest is 0.0070833 × ₹10,00,000 = ₹7,083. The remaining ₹1,595 of your EMI reduces the principal. Next month, interest is calculated on the slightly smaller balance, so a little more goes to principal, and so on.
| Period | Interest paid | Principal repaid | Balance at end |
|---|---|---|---|
| Month 1 | ₹7,083 | ₹1,595 | ₹9,98,405 |
| Year 1 total | ≈ ₹84,236 | ≈ ₹19,902 | ≈ ₹9,80,098 |
After a full year of EMIs totalling about ₹1,04,139, your loan has fallen by less than ₹20,000. The principal share grows steadily, and in the last few years almost the entire EMI goes to principal.
What prepayment does
Any lump sum you pay over and above the EMI goes straight to principal, and every rupee of principal removed early stops earning interest for the rest of the loan. Using the same loan, suppose you prepay ₹1 lakh at the end of year one. You usually have two choices:
| Option | Effect | Approximate interest saved |
|---|---|---|
| Keep EMI at ₹8,678, reduce tenure | Loan ends 48 months (4 years) earlier | ≈ ₹3.2 lakh |
| Keep tenure, reduce EMI | EMI falls to about ₹7,793 | ≈ ₹1.0 lakh |
Reducing the tenure saves far more interest. Choose the lower EMI only if you need the monthly cash flow.
Prepayment charges
Under RBI directions, banks and NBFCs cannot levy foreclosure or prepayment charges on floating-rate loans taken by individuals for non-business purposes. Fixed-rate loans and business loans may carry charges, so read your loan agreement or ask your lender.
What changes your EMI
- Interest rate: on ₹10 lakh for 20 years, each 0.5% rise adds roughly ₹300 a month. Floating-rate loans are linked to an external benchmark such as the repo rate, so they move when the RBI changes rates.
- Tenure: a longer tenure lowers the EMI but raises total interest sharply. When rates rise, banks often extend the tenure instead of raising the EMI; ask them to raise the EMI instead if you can afford it.
- Principal: a larger down payment reduces both EMI and total interest.
You can compare two offers side by side with the Loan Comparison tool, and check how much you are likely to be sanctioned with the Loan Eligibility Calculator.
Quick reference: EMI per ₹1 lakh borrowed
Multiply the figure below by the number of lakhs you plan to borrow. For example, a ₹25 lakh loan at 9% for 20 years costs about 25 × ₹900 = ₹22,500 a month.
| Interest rate | 5 years | 10 years | 15 years | 20 years | 25 years | 30 years |
|---|---|---|---|---|---|---|
| 8.5% | ₹2,052 | ₹1,240 | ₹985 | ₹868 | ₹805 | ₹769 |
| 9% | ₹2,076 | ₹1,267 | ₹1,014 | ₹900 | ₹839 | ₹805 |
| 10% | ₹2,125 | ₹1,322 | ₹1,075 | ₹965 | ₹909 | ₹878 |
| 12% | ₹2,224 | ₹1,435 | ₹1,200 | ₹1,101 | ₹1,053 | ₹1,029 |
| 14% | ₹2,327 | ₹1,553 | ₹1,332 | ₹1,244 | ₹1,204 | ₹1,185 |
Notice how little the EMI falls when you stretch a loan from 20 to 30 years: at 8.5% it drops by only about ₹99 per lakh, while you pay ten more years of interest. A longer tenure is rarely the bargain it appears.
Flat rate vs reducing balance
Some personal, vehicle and consumer-durable loans are quoted at a "flat" rate, where interest is calculated on the full original amount for the whole tenure. A 10% flat rate costs roughly the same as an 18% reducing-balance rate on a three-year loan. Always ask for the reducing-balance rate or the annual percentage rate (APR), which lenders must disclose in the Key Fact Statement. A Simple Interest Calculator shows how flat interest adds up.
Practical tips
- Keep total EMIs within about 40–50% of take-home pay; lenders use a similar limit.
- Prepay early in the loan, when the interest share is highest.
- Use bonuses, maturities or an annual step-up in EMI of 5–10% to shorten the loan dramatically.
- Review your rate every year. If your bank's rate is well above what new customers get, ask for a conversion or consider a balance transfer, after counting fees.
- Before prepaying a home loan, remember that interest on a self-occupied home can be deducted up to ₹2 lakh a year under the old tax regime. See New vs Old Tax Regime.
- Keep an emergency fund of at least six months' expenses before making large prepayments.
Try it: enter your loan in the free EMI Calculator and test different prepayment amounts to see how many years you can cut.
Frequently asked questions
What is the EMI on a Rs 10 lakh loan at 8.5% for 20 years?
About Rs 8,678 a month. Over 240 months you pay about Rs 20.83 lakh in total, of which about Rs 10.83 lakh is interest.
Is it better to reduce EMI or tenure after prepayment?
Reducing the tenure saves much more interest. In the Rs 10 lakh example, a Rs 1 lakh prepayment after one year saves about Rs 3.2 lakh if you keep the EMI, versus about Rs 1 lakh if you reduce the EMI.
Do banks charge for prepaying a home loan?
Banks and NBFCs cannot charge prepayment penalties on floating-rate loans taken by individuals for non-business purposes. Fixed-rate and business loans may carry charges.
Why is most of my early EMI going to interest?
Interest is charged on the outstanding balance, which is highest at the start. As the balance falls, the interest part shrinks and more of each EMI repays principal.