How to Calculate EMI for a Loan: Formula, Examples and Tips

EMI stands for Equated Monthly Installment — the fixed amount you pay every month towards a loan. It includes both principal and interest, calculated so that the loan is fully paid off at the end of the tenure. Here is exactly how it works. The EMI Formula EMI = [P × R × (1+R)^N] / [(1+R)^N − 1] Where: - P = Principal loan amount (₹) - R = Monthly interest rate (annual rate ÷ 12 ÷ 100) - N = Total number of months This is the standard reducing-balance formula used by every Indian bank. The key insight: each EMI is split between interest (calculated on the outstanding balance) and principal repayment. As you pay each EMI, the balance falls, so the next month's interest is slightly less, and slightly more of the EMI goes towards principal. Worked Example: ₹10 Lakh for 5 Years at 10% Per Annum - P = ₹10,00,000 - R = 10/12/100 = 0.00833 - N = 60 EMI = [10,00,000 × 0.00833 × (1.00833)^60] / [(1.00833)^60 − 1] EMI = [10,00,000 × 0.00833 × 1.6453] / [0.6453] EMI ≈ ₹21,247 Total payable: ₹21,247 × 60 = ₹12,74,820 Total interest: ₹2,74,820 Month 1 split: Interest = 10,00,000 × 0.00833 = ₹8,333. Principal = 21,247 − 8,333 = ₹12,914. Month 60 split: Interest ≈ ₹176. Principal ≈ ₹21,071. Reducing Balance vs Flat Rate The formula above is reducing balance. Some lenders (especially for two-wheelers, consumer durables, dealer financing) use FLAT RATE: Flat-rate EMI = (P + P × R × N_years) / (N × 12) For the same ₹10 lakh at 10% flat for 5 years: - Total flat interest = 10,00,000 × 10% × 5 = ₹5,00,000 - Flat EMI = (10,00,000 + 5,00,000) ÷ 60 = ₹25,000 The flat-rate EMI is ₹25,000 vs reducing-rate EMI of ₹21,247 — a 17.7% higher monthly outflow for the same advertised rate. The "10%" flat rate actually corresponds to roughly 18% reducing rate. Always ask your lender whether the rate is flat or reducing. For salaried borrowers from banks, it's almost always reducing. For dealer-arranged loans, it's often flat — verify before signing. Three Variables That Decide Your EMI 1. Principal: Linear effect. Doubling the loan doubles the EMI. 2. Interest rate: Roughly linear at common rates. 1% rate increase on a ₹50L 20-year loan adds ~₹3,300 to monthly EMI. 3. Tenure: Non-linear and counterintuitive. Doubling tenure does NOT halve the EMI — it reduces it by about 30-40% but more than doubles the total interest paid. The Tenure Trap A common mistake is choosing the longest tenure to minimise EMI. On a ₹50L home loan at 8.5%: - 15 years: EMI ₹49,237, total interest ₹38.6L - 30 years: EMI ₹38,446, total interest ₹88.4L You save ₹10,791/month on EMI but pay ₹50 lakh extra in interest. Choose the shortest tenure your salary can comfortably support. Prepayment Magic Prepaying ₹2 lakh once at the end of year 2 on a ₹50L 20-year home loan at 8.5%: - Tenure cut: ~11 months - Interest saved: ~₹3.9 lakh The ratio of interest saved to prepayment is roughly 2:1 for early prepayments and falls to under 0.5:1 for prepayments in the final years. Front-load your prepayments. Loan Eligibility (FOIR) Banks use the Fixed Obligation to Income Ratio (FOIR) to decide your maximum EMI: - For salaries up to ₹40,000/month: FOIR 40% - ₹40,000-₹80,000: FOIR 50% - Above ₹80,000: FOIR 60-65% If your gross monthly is ₹1 lakh, your maximum EMI for new loans is ₹50,000-₹65,000 minus your existing EMIs. Common Errors To Avoid - Confusing flat rate with reducing rate (always verify) - Ignoring processing fee, which can add 0.5-2% to the effective rate - Choosing a long tenure without computing total interest - Not modelling a prepayment scenario before signing - Comparing EMIs without comparing total payable Use the EMI Calculator, Prepayment Calculator and Flat vs Reducing Calculator on this site to run exact numbers for your specific loan offer.