How EMI is calculated, with a worked example
Updated 2026-11-13
Quick answer
EMI is worked out with P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the loan, r the monthly rate and n the number of months. A ₹10,00,000 loan at 9% for 20 years has an EMI of ₹8,997.
Steps
- Write down the loan amount (P), the yearly interest rate and the tenure.
- Divide the yearly rate by 12 and by 100 to get the monthly rate r. For 9% that is 0.0075.
- Turn the tenure into months (n). Twenty years is 240 months.
- Work out (1 + r)^n. Here 1.0075^240 is about 6.0092.
- Put the numbers into the formula to get the EMI: about ₹8,997.
Why the EMI stays the same but its parts change
Every month the lender charges interest on what you still owe, not on the original loan. In month one the balance is ₹10,00,000, so the interest is 10,00,000 × 0.0075 = ₹7,500. The EMI is ₹8,997.26, so only ₹1,497 goes to principal.
Next month the balance is a little lower, so the interest is a little lower and a little more of the same EMI repays principal. Near the end almost the whole instalment is principal. This is called a reducing-balance loan, and it is why paying down principal early saves so much interest.
How tenure changes what you pay
On the same ₹10,00,000 at 9%: a 10-year loan has an EMI of ₹12,668 and costs ₹5,20,109 in interest. At 15 years the EMI is ₹10,143 and the interest ₹8,25,680. At 20 years it is ₹8,997 and ₹11,59,342. At 25 years it is ₹8,392 and ₹15,17,589.
A longer tenure lowers the monthly burden but makes the loan cost far more. Many people choose the shortest tenure whose EMI still fits their budget comfortably.
What the EMI does not include
The formula covers the principal and the interest only. Processing fees, insurance, GST on fees and any prepayment charges are separate. A lender’s schedule can also differ by a few rupees because of rounding and the date the first instalment is due.
Try it yourself
Common questions
What is the EMI formula?
EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), with r = yearly rate ÷ 12 ÷ 100 and n = months.
Is more of my early EMI interest?
Yes. The interest is charged on the outstanding balance, which is largest at the start.
How can I reduce the total interest?
Choose a shorter tenure, make a larger down payment or prepay part of the principal.
Does a flat rate give the same EMI?
No. A flat rate charges interest on the full amount for the whole tenure and costs much more than the same quoted reducing rate.