Loans
How to Calculate EMI: Formula, Example and What It Really Costs
Learn the EMI formula with a worked ₹10 lakh example, see how much interest you pay over 10, 15 and 20 years, and how prepayment cuts the total.
An EMI looks like a simple number on a loan offer: pay this much every month and the loan is gone. What the number hides is how much of each payment is interest, and how strongly the tenure changes the total you hand back to the bank. Once you can work out an EMI yourself, comparing two offers takes minutes instead of a branch visit.
The EMI formula
Banks in India and most lenders worldwide use the same reducing-balance 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. A quoted 8.75% becomes 0.0072917.
- n is the number of monthly instalments: 20 years is 240.
The most common slip is using the annual rate directly. If you plug in 8.75 instead of 0.0072917, the answer is wildly wrong, so convert the rate first.
A worked example: ₹10 lakh at 8.75% for 20 years
Take a home loan of ₹10,00,000 at 8.75% a year for 20 years.
- Monthly rate r = 8.75 ÷ 12 ÷ 100 = 0.0072917
- n = 20 × 12 = 240
- (1 + r)240 ≈ 5.7203
- EMI = 10,00,000 × 0.0072917 × 5.7203 ÷ (5.7203 − 1) ≈ ₹8,837
Over 240 months you pay ₹21,20,906 in total, which means ₹11,20,906 is interest: more than the amount you borrowed. That is normal for a 20-year loan, but most people are surprised the first time they see it.
Where your first payments go
In month one, interest is charged on the full ₹10 lakh: 10,00,000 × 0.0072917 = ₹7,291.67. Only the remaining ₹1,545.44 of your ₹8,837 EMI reduces the loan. As the balance falls, the interest part shrinks and the principal part grows, which is why a loan seems to move slowly for the first few years and then speeds up near the end.
This also explains why prepaying early saves so much more than prepaying late: early on, every rupee of principal you clear stops attracting interest for many more months.
How tenure changes the total cost
Same ₹10 lakh, same 8.75% rate, three different tenures:
| Tenure | EMI | Total interest | Total paid |
|---|---|---|---|
| 10 years | ₹12,533 | ₹5,03,921 | ₹15,03,921 |
| 15 years | ₹9,994 | ₹7,99,008 | ₹17,99,008 |
| 20 years | ₹8,837 | ₹11,20,906 | ₹21,20,906 |
Stretching from 15 to 20 years lowers the EMI by about ₹1,157 a month but adds more than ₹3.2 lakh of interest. A longer tenure is useful when the lower EMI is what makes the loan affordable; it is an expensive choice if you could comfortably pay more.
A small rate difference is not small
Rates of 8.75% and 9.25% sound close. On ₹10 lakh over 20 years the EMI moves from ₹8,837 to ₹9,159, and total interest rises from ₹11.21 lakh to ₹11.98 lakh: about ₹77,000 for half a percentage point. When you compare offers, also ask about processing fees and whether the rate is fixed or linked to an external benchmark such as the repo rate, because a floating rate can change during the loan.
What prepayment does
Two simple strategies on the same 20-year loan:
- Pay 10% more every month (about ₹9,721 instead of ₹8,837). The loan closes in 191 months instead of 240, and total interest falls to roughly ₹8.55 lakh.
- Make one ₹1 lakh part-payment after the first year and keep the EMI unchanged. The loan again finishes in about 191 months, and total interest drops to roughly ₹7.84 lakh.
Both save lakhs. Before prepaying, check your loan agreement for prepayment charges. For floating-rate home loans taken by individuals, RBI rules generally do not allow banks to charge prepayment penalties, but fixed-rate and business loans can differ.
Fixed or floating: what changes for the EMI
With a fixed rate, the EMI stays the same for the period the rate is fixed. With a floating rate linked to an external benchmark, the bank resets your rate when the benchmark moves. When rates rise, most lenders first extend the tenure and keep the EMI unchanged, which quietly adds interest. If that happens, ask the bank whether you can raise the EMI instead of stretching the loan; it usually costs far less over time.
Quick checks before you sign
- Confirm whether the quoted rate is per year and whether it is fixed or floating.
- Ask for the full amortisation schedule, not just the EMI.
- Keep your EMI comfortably within your monthly budget; many lenders look at whether all your EMIs together stay under about 40–50% of take-home pay.
- Add processing fees and insurance to the cost when comparing offers.
You can run your own numbers, including part-payments and a full yearly schedule, with the EMI Calculator or the Loan Calculator.
Frequently asked questions
Is EMI calculated on reducing balance or flat rate?
Most bank loans in India, including home, car and personal loans, use the reducing-balance method shown here. Some consumer-durable and older personal-loan schemes quote a flat rate, which is charged on the original amount for the whole term and costs much more than the same number on a reducing balance.
Does a longer tenure always mean more interest?
Yes, at the same rate. Each extra year keeps a balance outstanding for longer, so more interest builds up even though the monthly EMI is lower.
Can I reduce my EMI after taking the loan?
You can make a part-payment and ask the lender to recalculate the EMI on the lower balance, or ask for a rate reset if market rates have fallen. Balance transfer to another lender is another option, but compare the fees first.
