Lesson 1
How EMI is calculated
An EMI looks like one fixed number, but inside it two things change every month: the interest you pay and the principal you repay. Once you see how they trade places, the effect of tenure and rate on a loan becomes obvious.
The balance, month by month
On a reducing-balance loan, each month runs the same three steps:
- Interest for the month = balance you still owe × monthly rate (yearly rate ÷ 12 ÷ 100).
- Your EMI pays that interest first.
- Whatever is left of the EMI reduces the balance.
Here is ₹1,00,000 borrowed at 12% a year for 12 months, where the monthly rate is exactly 1% and the EMI is ₹8,884.88:
| Month | Balance at start | Interest (1%) | Principal repaid | Balance at end |
|---|---|---|---|---|
| 1 | ₹1,00,000.00 | ₹1,000.00 | ₹7,884.88 | ₹92,115.12 |
| 2 | ₹92,115.12 | ₹921.15 | ₹7,963.73 | ₹84,151.39 |
| 3 | ₹84,151.39 | ₹841.51 | ₹8,043.36 | ₹76,108.03 |
| … months 4 to 11 … | ||||
| 12 | ₹8,796.91 | ₹87.97 | ₹8,796.91 | ₹0.00 |
The interest part falls from ₹1,000 in month 1 to ₹87.97 in month 12, and the principal part rises by the same amount. Over the year you pay ₹6,618.55 in interest.
Where the formula comes from
The lender wants the EMIs, each discounted back to today at the loan rate, to add up exactly to the amount lent. Writing that down gives the present value of n equal payments:
P = EMI × [1 − (1 + r)−n] ÷ r
Rearranging for the EMI gives the familiar form:
EMI = P × r × (1 + r)n ÷ [(1 + r)n − 1]
Check with the example: 1,00,000 × 0.01 × 1.126825 ÷ 0.126825 = ₹8,884.88. If the rate were zero, the formula would not apply and the EMI would simply be P ÷ n.
Tenure: a smaller EMI, a bigger total
Stretching the same ₹25,00,000 loan at an example 8.5% over more years lowers the EMI, but the interest keeps adding up for longer:
| Tenure | EMI | Total interest | Interest per ₹1 borrowed |
|---|---|---|---|
| 10 years | ₹30,996 | ₹12,19,571 | ₹0.49 |
| 15 years | ₹24,618 | ₹19,31,328 | ₹0.77 |
| 20 years | ₹21,696 | ₹27,06,939 | ₹1.08 |
| 25 years | ₹20,131 | ₹35,39,203 | ₹1.42 |
| 30 years | ₹19,223 | ₹44,20,221 | ₹1.77 |
In the 20-year case, the first 12 EMIs total ₹2,60,347, of which ₹2,10,591 is interest and only ₹49,756 repays principal.
Rate: small changes, large totals
| Rate (20 years, ₹25,00,000) | EMI | Total interest |
|---|---|---|
| 8% | ₹20,911 | ₹25,18,640 |
| 8.5% | ₹21,696 | ₹27,06,939 |
| 9% | ₹22,493 | ₹28,98,356 |
Going from 8.5% to 9% raises the EMI by ₹798 a month, yet adds ₹1,91,416 to the lifetime interest, because the difference applies to every one of 240 months.
What your lender must show you
- For retail and MSME term loans sanctioned on or after 1 October 2024, RBI requires a Key Facts Statement that includes a computation of the Annual Percentage Rate (the yearly cost of credit, including the interest rate and all other charges) and the loan's amortisation schedule (Source: Reserve Bank of India, checked 26 October 2026).
- For EMI-based floating-rate personal loans, lenders must provide a statement at the end of each quarter showing at least the principal and interest recovered to date, the EMI, the number of EMIs left and the annualised rate for the whole tenure (Source: Reserve Bank of India, checked 26 October 2026).
Compare your lender's schedule with the EMI calculator. Small differences usually come from rounding and day counts; large ones are worth asking about.
Sources
- Key Facts Statement (KFS) for Loans & Advances, circular RBI/2024-25/18, 15 April 2024. Reserve Bank of India. Checked 26 October 2026.
- Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans, circular RBI/2023-24/55, 18 August 2023 (updated as on 1 October 2025). Reserve Bank of India. Checked 26 October 2026.
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