How EMI Is Calculated: Formula, Example and Flat vs Reducing Rate

An EMI (equated monthly instalment) is calculated with the formula EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), where P is the loan amount, r is the monthly interest rate and n is the number of months. For a ₹10,00,000 loan at 9% a year over 5 years, that gives an EMI of ₹20,758.

Below, the formula is worked through step by step, then compared with the “flat rate” method some lenders still quote. This guide is general information, not financial advice.

The EMI formula

• P is the principal, the amount you borrow.
• r is the monthly interest rate: the annual rate divided by 12, written as a decimal. For 9% a year, r = 0.09 ÷ 12 = 0.0075.
• n is the tenure in months. Five years is 60 months.

The formula finds the single fixed payment that repays the loan, plus interest on the reducing balance, in exactly n months. It is the same formula used for car loans, personal loans and home loans worldwide.

Worked example: ₹10 lakh at 9% for 5 years

Step 1: monthly rate. r = 9 ÷ 12 ÷ 100 = 0.0075.

Step 2: the growth factor. (1 + r)ⁿ = 1.0075⁶⁰ = 1.565681.

Step 3: plug in.

Step 4: totals. Over 60 months you pay 60 × ₹20,758.36 = ₹12,45,501. The interest is ₹12,45,501 − ₹10,00,000 = ₹2,45,501.

You can check any loan in seconds with the EMI calculator, which also prints the full repayment schedule.

Where each EMI goes

Every EMI pays the interest due for that month first. The rest reduces the principal. Interest is charged only on what you still owe, which is why this is called the reducing balance method.

The EMI stays the same, but each month a little less goes to interest and a little more to principal. In the last months, almost the whole EMI is principal.

Long loans are interest-heavy

The longer the tenure, the more total interest you pay. A ₹50 lakh home loan at 8.5% for 20 years has an EMI of ₹43,391. Over 240 months you pay about ₹54.1 lakh in interest, more than the amount you borrowed. A longer tenure lowers the EMI but raises the total cost.

Flat rate vs reducing balance rate

Some lenders, especially for vehicles, consumer goods and some personal loans, quote a flat rate. Under a flat rate, interest is charged on the full original loan for the whole tenure, even though you repay part of it every month.

Take the same ₹10 lakh at a 9% flat rate for 5 years:

• Interest = 10,00,000 × 0.09 × 5 = ₹4,50,000
• EMI = (10,00,000 + 4,50,000) ÷ 60 = ₹24,167

The flat-rate loan costs ₹2,04,499 more. To compare it fairly, convert it to a reducing rate: an EMI of ₹24,167 on ₹10 lakh over 60 months matches a reducing-balance rate of about 15.7% a year. The equivalent rate depends on the tenure: a 9% flat rate works out to about 16.2% over 1 year and about 14.5% over 10 years. So always work out the exact figure for the loan in front of you.

Use the APR to compare offers

You do not have to do this conversion by hand. Under the Reserve Bank of India’s Key Facts Statement rules, banks and NBFCs must give you a Key Facts Statement (KFS) for retail and MSME term loans sanctioned from October 1, 2024. It includes the Annual Percentage Rate (APR), which is the yearly cost of credit including interest and other charges, and a repayment schedule. Compare loans by APR, not by the headline rate.

What changes your EMI

Floating rates

Most Indian home loans have floating rates linked to an external benchmark. When the rate changes, either the EMI or the tenure changes. RBI’s 2023 circular on floating-rate EMI loans requires lenders to explain this at sanction, communicate any increase in EMI or tenure, and give borrowers options at reset, such as a higher EMI, a longer tenure or prepayment.

Lenders often extend the tenure first when rates rise, because the EMI stays the same. That feels painless but can add years of interest. Check your statement after every rate change.

Prepayment

Paying part of the loan early reduces the balance that interest is charged on. In the ₹10 lakh example, the balance after 12 EMIs is ₹8,34,170. Suppose you prepay ₹1,00,000 then:

Cutting the tenure saves about twice as much interest. Lowering the EMI is useful if you need breathing room in your budget.

Check charges before you prepay. RBI’s Pre-payment Charges on Loans Directions, 2025 bar regulated lenders from levying pre-payment charges on floating-rate loans to individuals for non-business purposes, for loans sanctioned or renewed from January 1, 2026. Fixed-rate loans can still carry charges, which must be disclosed in the sanction letter, loan agreement and KFS. The same idea works for home loans everywhere; our guide on how extra payments shorten a mortgage shows the effect over 30 years.

Quick checks before you sign

1. Ask whether the rate is reducing balance or flat.
2. Compare the APR in the Key Facts Statement, not just the interest rate.
3. Look at processing fees, insurance and other charges; they are part of the real cost.
4. Ask what happens to your EMI or tenure when a floating rate changes.
5. Confirm the prepayment and foreclosure terms.

To test different amounts, rates and tenures, use the EMI calculator or the general loan calculator. If you are deciding between borrowing and investing, our guide on SIP vs lumpsum investing explains how regular investments grow.

FAQ

How is EMI calculated on a reducing balance?

Use EMI = P × r × (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1), with r as the monthly rate and n in months. Each month, interest is charged on the outstanding balance and the rest of the EMI reduces the principal.

Why does most of my early EMI go to interest?

Interest is charged on the outstanding balance, which is largest at the start. In the ₹10 lakh example, ₹7,500 of the first EMI is interest; by the final months, interest is only a few hundred rupees.

Is a 9% flat rate the same as 9% interest?

No. A 9% flat rate charges interest on the original loan for the whole tenure. On a 5-year loan it works out to about 15.7% on a reducing-balance basis.

Does a longer tenure reduce my total cost?

No. A longer tenure lowers the EMI but increases the total interest, because you owe money for longer.