How your EMI is calculated
The reducing-balance formula lenders use, explained with a worked example.
Published 22 October 2026
Most loans in India — home, personal, vehicle and business loans — use the reducing-balance method. Interest is charged each month on the amount you still owe, so as you repay principal, the interest part of each EMI falls.
The formula
EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)
- P is the loan amount (principal)
- r is the monthly interest rate: the annual rate ÷ 12 ÷ 100
- n is the number of monthly instalments
A worked example
Say you borrow ₹50,00,000 at 8.5% a year for 20 years.
- r = 8.5 ÷ 12 ÷ 100 = 0.0070833
- n = 20 × 12 = 240
- EMI ≈ ₹43,391 a month
Over 240 months you repay about ₹1,04,13,942. That means the total interest is about ₹54,13,942 — more than the amount you borrowed. Principal makes up roughly 48% of what you pay and interest about 52%.
Why not simply ₹43,391 × 240? Because the exact EMI is ₹43,391.16. Lenders bill a whole-rupee EMI, so the small shortfall each month is settled in the final instalment, which comes to about ₹43,493. Try it in our home loan calculator.
What this tells you
- Tenure matters a lot. A longer tenure lowers the EMI but raises the total interest.
- Early payments are mostly interest. In the first years, most of each EMI goes to interest. Prepaying early saves more than prepaying late.
- Fees add to the cost. Processing fees and other charges aren’t in the EMI, so compare the total cost, not just the EMI.
These are estimates. Your lender’s actual rate, fees and rounding will differ.