How EMI is calculated: the formula, step by step

Indian retail loans use monthly reducing-balance interest. The instalment is EMI = P × r × (1+r)^n ÷ ((1+r)^n − 1), where P is the amount borrowed, r is the monthly interest rate and n is the number of monthly instalments.

The monthly rate is the annual rate divided by 12 and then by 100. A 8.75% annual rate becomes 8.75 ÷ 12 ÷ 100 = 0.0072917 per month. If the rate is genuinely 0%, the formula collapses to P ÷ n.

Borrow ₹35,00,000 at 8.75% a year for 20 years (240 months). The monthly rate is 0.0072917, and (1+r)^240 works out to about 5.7228. Putting those into the formula gives an EMI of about ₹30,930.

Over the full 240 instalments you repay roughly ₹74,23,170, of which about ₹39,23,170 is interest — more than the amount you borrowed. That total, not the EMI, is the number worth planning around.

Interest for a month is simply the outstanding balance × the monthly rate. Whatever is left of the EMI reduces the principal.

In month 1 of the example above, interest is ₹35,00,000 × 0.0072917 ≈ ₹25,521, so only about ₹5,409 of the ₹30,930 instalment repays the loan. By the final year almost the whole instalment is principal. This front-loading is why prepaying early saves far more than prepaying late.

• Processing fees, documentation and legal or valuation charges, which are usually deducted upfront or added to the loan.
• GST on fees and on any prepayment or foreclosure charge.
• Insurance premiums that lenders sometimes fund alongside the loan.
• Rate resets on floating-rate loans — a repo-linked home loan rate can change several times over 20 years.
• Part-disbursed loans, where pre-EMI interest is charged on the amount released so far.

Enter your loan in the EMI calculator to see the instalment, the total interest and the full month-by-month schedule. If the EMI matches your sanction letter but the total interest surprises you, that is normal — and it is exactly the number a prepayment plan attacks.