Every bank and NBFC in India uses the same EMI formula, yet most borrowers do not know how their monthly payment is calculated. Understanding this helps you negotiate better terms and plan prepayments strategically.
The EMI formula
EMI = P × r × (1+r)^n / ((1+r)^n − 1)
Where: P = Principal loan amount, r = Monthly interest rate (annual rate ÷ 12 ÷ 100), n = Number of monthly instalments
Example: Home loan of ₹50 lakh at 8.5% for 20 years.
r = 8.5/(12×100) = 0.00708
n = 240 months
EMI = ₹50,00,000 × 0.00708 × (1.00708)^240 / ((1.00708)^240 − 1)
EMI ≈ ₹43,391/month
Why the reducing balance method matters
Indian banks use the "reducing balance" method — interest is charged only on the outstanding principal, not the original amount. This means your early EMIs are mostly interest, and later EMIs are mostly principal. In the above example, in month 1 you pay ₹29,167 in interest and only ₹14,224 towards principal.
How to reduce total interest paid
- Prepayment: Even one extra EMI per year reduces tenure significantly. On a ₹50L home loan, one extra payment per year saves approximately ₹4.8L in total interest.
- Shorter tenure: Moving from 20 to 15 years increases EMI by ~17% but reduces total interest by ~35%.
- Negotiate rate: Moving from 8.5% to 8.0% on ₹50L saves approximately ₹1.7L over 20 years.
Use our free EMI Calculator to try different scenarios with your loan details.