How loan EMI is calculated: the formula, the interest split and what prepayment does

An EMI (equated monthly instalment) is the one fixed payment that clears a loan, interest included, in exactly the number of months you agreed. Lenders work it out with the reducing-balance formula: EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the amount borrowed, r is the yearly rate divided by 12 and n is the number of monthly instalments. For ₹50 lakh at 8.5% over 20 years that comes to ₹43,391.16 a month, and ₹54,13,878.80 of interest over the life of the loan, which is more than the amount borrowed. Every number in this guide comes from our EMI calculator and its sister loan tools, which you can run with your own figures.

The formula, one step at a time

“Reducing balance” means interest is charged each month only on what you still owe. The formula finds the single payment that covers each month’s interest and still brings the balance to zero on the last instalment. Take ₹50 lakh at 8.5% a year for 20 years:

1. Monthly rate. r = 8.5 ÷ 12 ÷ 100 = 0.0070833.
2. Number of instalments. n = 20 × 12 = 240.
3. Growth factor. (1 + r)^n = 1.0070833^240, which is about 5.4412.
4. EMI. 50,00,000 × 0.0070833 × 5.4412 ÷ (5.4412 − 1) = ₹43,391.16 once the rounding in steps 1 and 3 is removed.

Now look inside the first payment. Interest for month one is 50,00,000 × 8.5% ÷ 12 = ₹35,416.67. The rest of the EMI, about ₹7,974, repays the loan. In month two the interest is worked out on the slightly smaller balance, so a little less goes to interest and a little more to principal, and so on for 240 months.

A “flat rate” quote is different: interest is charged on the original amount for the whole term, so a flat 8.5% costs far more than a reducing-balance 8.5%. Check which one a quote uses.

How the split between interest and principal changes

The EMI never changes, but what it is made of does. A short loan shows the whole journey. Here is an ₹8 lakh car loan (₹10 lakh on-road price, ₹2 lakh down payment) at 9% for 5 years, taken from the month-by-month table in the car loan calculator. The EMI is ₹16,606.68.

Month	Interest	Principal	Balance after payment
1	₹6,000.00	₹10,606.68	₹7,89,393.32
12	₹5,091.38	₹11,515.30	₹6,67,335.98
24	₹4,011.17	₹12,595.51	₹5,22,227.16
36	₹2,829.62	₹13,777.06	₹3,63,506.14
60	₹123.62	₹16,483.06	₹0.00

Interest over the five years is ₹1,96,401.05, so the car costs ₹11,96,401.05 in all with the down payment.

A 20-year home loan stretches the same curve. This is the ₹50 lakh loan at 8.5% from the year-by-year schedule in the home loan EMI calculator:

Year	Principal paid in the year	Interest paid in the year	Balance at year end
1	₹99,511.46	₹4,21,182.48	₹49,00,488.54
5	₹1,39,640.92	₹3,81,053.02	₹44,06,359.16
10	₹2,13,273.67	₹3,07,420.27	₹34,99,691.14
12	₹2,52,642.87	₹2,68,051.07	₹30,14,923.15
15	₹3,25,733.00	₹1,94,960.94	₹21,14,936.53
20	₹4,97,492.20	₹23,201.74	₹0.00

In year one you pay ₹5,20,693.94 and about 81% of it is interest. Halfway through the term, after 120 payments, you still owe ₹34,99,691.14, which is about 70% of what you borrowed. The calculator shows principal overtaking interest in month 143, in year 12. A balance that barely moves at first is normal: it is how a level payment on a large balance behaves.

How tenure changes the total interest

A longer tenure lowers the EMI, but the balance stays high for longer, so far more interest builds up. The same ₹50 lakh at 8.5%:

Tenure	EMI	Total interest	Total repaid	Principal overtakes interest
10 years	₹61,992.84	₹24,39,141.33	₹74,39,141.33	Month 23
15 years	₹49,236.98	₹38,62,656.02	₹88,62,656.02	Month 83
20 years	₹43,391.16	₹54,13,878.80	₹1,04,13,878.80	Month 143
30 years	₹38,445.67	₹88,40,442.70	₹1,38,40,442.70	Month 263

Stretching from 20 to 30 years cuts the EMI by only ₹4,945.49 but adds ₹34,26,563.90 of interest. A 15-year loan costs ₹5,845.82 more a month than a 20-year one and saves ₹15,51,222.78. The EMI tells you whether you can afford the loan; total interest tells you what it costs.

How the interest rate changes it

Here is ₹50 lakh over 20 years at different rates:

Rate	EMI	Total interest	Interest as a share of everything you pay
7.5%	₹40,279.66	₹46,67,118.32	48.3%
8.5%	₹43,391.16	₹54,13,878.80	52.0%
9%	₹44,986.30	₹57,96,711.47	53.7%
9.5%	₹46,606.56	₹61,85,574.25	55.3%

Half a percentage point, from 8.5% to 9%, adds ₹1,595.14 to the EMI and ₹3,82,832.67 to the interest over 20 years.

On a floating-rate loan the rate in this sum is only a snapshot. The Reserve Bank of India’s directions to commercial banks say floating-rate retail loans such as housing and auto loans must be tied to an external benchmark, and that the rate is reset at least once in three months. RBI’s conduct directions, as issued on 28 November 2025, also set out what a bank owes you when the rate moves:

• At sanction, it must tell you clearly how a change in the benchmark could change your EMI, your tenor or both, and tell you straight away when either one goes up.
• When rates are reset for a whole class of borrowers, it must let you choose a higher EMI, more EMIs at the same amount, or a mix of the two, and let you prepay in part or in full. A switch to a fixed rate is on the list only where the bank offers one.
• Lengthening the tenor must not lead to negative amortisation, where the EMI no longer covers the month’s interest and the balance grows.
• Each quarter it must give you a statement showing the principal and interest recovered so far, the EMI, the number of EMIs left and the annualised rate.

What prepayment does

A prepayment goes straight to the balance, so every later month’s interest is worked out on a smaller amount. The loan prepayment calculator shows the effect of adding a fixed amount to each EMI. For the ₹50 lakh, 8.5%, 20-year loan:

Extra paid every month	Interest saved	Tenure cut by	New tenure
₹2,000	₹6,69,292.42	2 years 1 month	17 years 11 months
₹5,000	₹13,89,249.71	4 years 5 months	15 years 7 months
₹10,000	₹21,78,721.22	7 years 1 month	12 years 11 months

Reduce the tenure or reduce the EMI?

After a lump-sum prepayment a lender can keep your EMI and shorten the loan, or keep the end date and lower the EMI. Suppose you owe ₹40 lakh at 8.5% with 15 years left. The EMI is ₹39,389.58 and ₹30,90,124.82 of interest is still to come. You prepay ₹5 lakh.

After prepaying ₹5 lakh	EMI	Time left	Interest still to pay	Interest saved
Reduce the EMI	₹34,465.88	15 years	₹27,03,859.21	₹3,86,265.61
Reduce the tenure	₹39,389.58	11 years 9 months	₹20,39,416.10	₹10,50,708.72

Keeping the EMI saves ₹6,64,443.11 more and ends the loan 3 years 3 months sooner, because you go on paying ₹4,923.70 a month more than the lower EMI and all of it reduces the balance. If your budget is tight, the lower EMI is a fair choice, and you can still pay extra in the months when you have it. Tell the lender in writing which option you want.

Can the lender charge you for prepaying?

RBI’s conduct directions say a bank shall not levy pre-payment charges on a floating-rate loan given to an individual for a purpose other than business. For loans sanctioned or renewed on or after 1 January 2026 they spell out more. The ban holds whether you prepay in part or in full, whatever the source of the money, and with no minimum lock-in period. For other loans, including fixed-rate ones, any charge follows the bank’s own approved policy and, on a term loan, must be based on the amount being prepaid. Whether a charge applies must be disclosed in the sanction letter, the loan agreement and the Key Facts Statement, and a charge that was not disclosed there cannot be levied. On a loan that mixes fixed and floating periods, the rule depends on which rate applies on the day you prepay.

These directions bind commercial banks. The July 2025 directions that first set the 2026 rule also covered co-operative banks, non-banking financial companies and All India Financial Institutions. If your lender is not a bank, read its Key Facts Statement and the RBI directions for that type of lender.

How to check this yourself

1. Open the EMI calculator and fill in Loan amount, Interest rate (per year) and Tenure. It shows the monthly EMI, total interest, total payment, the interest share of the total and a year-by-year schedule.
2. The home loan EMI calculator adds the month when principal overtakes interest and the interest paid in year 1.
3. For a month-by-month table, use the car loan calculator with Car price (on-road) and Down payment.
4. For prepayment, enter Outstanding loan, Interest rate (per year), Remaining tenure and Extra payment every month in the loan prepayment calculator. To model a lump sum with the EMI kept, enter the reduced balance and put the gap between the old and new EMI (₹4,923.70 in the example above) as the extra payment.

Then compare the result with your lender’s paperwork. For new retail term loans, RBI requires the Key Facts Statement to include the amortisation schedule and an annual percentage rate that counts all charges.

The tools assume equal monthly periods, one interest rate for the whole term and no fees. They do not model rate resets, processing fees, insurance, stamp duty or prepayment charges, and the prepayment tool handles a fixed monthly top-up, not a series of lump sums. Prepaying a home loan can also shrink a tax deduction: under the old regime, interest on a home you live in is deductible up to ₹2 lakh a year. The home-loan tax benefit calculator shows what that is worth to you.

Related tools

• EMI calculator: EMI, total interest and a yearly schedule.
• Home loan EMI calculator: adds the month principal overtakes interest.
• Car loan calculator: total cost of ownership and a month-by-month table.
• Loan prepayment calculator: interest and time saved by paying extra.
• Home-loan tax benefit calculator: what the deductions are worth.

Loan figures were computed with the calculators above on 13 October 2026. RBI updates its directions from time to time, so check the current text and your own loan agreement. This is general information, not financial advice.