How EMI Is Calculated
Every EMI quoted by an Indian bank comes from one formula. Here's exactly how it works, worked through with real numbers.
The formula
EMI = [P × r × (1 + r)ⁿ] ÷ [(1 + r)ⁿ − 1]
Where P is the loan principal, r is the monthly interest rate (your annual rate divided by 12, then by 100 to convert from a percentage), and n is the total number of monthly installments (years × 12).
Why it's not just principal ÷ months
A simpler approach — dividing the total amount owed (principal + total interest) evenly by the number of months — doesn't reflect how interest actually accrues. Banks use the reducing balance method: interest for any given month is charged only on the loan balance still outstanding at the start of that month. As you repay principal, the balance shrinks, so less interest accrues each month even though the total EMI stays fixed. The formula above is the closed-form solution that produces a constant monthly payment under that reducing-balance interest pattern.
Worked example
Take a ₹25,00,000 home loan at 8.5% annual interest for 20 years.
- P = 25,00,000
- r = 8.5 ÷ 12 ÷ 100 = 0.007083
- n = 20 × 12 = 240 months
Plugging into the formula gives an EMI of approximately ₹21,700/month. Over 240 months, total payment is roughly ₹52.1 lakh, meaning total interest paid is roughly ₹27.1 lakh — more than the original principal, which is typical for a long-tenure loan at this rate. Shortening the tenure or making prepayments reduces this interest total significantly, since it directly shrinks the number of months interest has time to accrue on a large outstanding balance.
Why the interest-to-principal ratio shifts over time
In the early months of a loan, the outstanding balance is at its highest, so a large share of each EMI goes toward interest and only a small share reduces principal. As the balance falls, that ratio flips — later EMIs are mostly principal repayment. This is exactly why an amortization schedule (shown on the EMI Calculator) is more informative than the EMI figure alone: it shows you, month by month, how the principal-vs-interest split evolves.
Use the EMI Calculator to compute this instantly for your own loan amount, rate and tenure, complete with a full year-wise amortization table.
Checked against official sources as of August 2026. See our editorial process. For informational purposes only — not financial or tax advice.