The formula
EMI stands for Equated Monthly Installment — the fixed amount you pay each month for the life of a loan. Almost every Indian bank and NBFC calculates it using the reducing-balance formula:
EMI = P × r × (1 + r)n ÷ [(1 + r)n − 1]
P is your loan amount, r is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the number of monthly installments. It looks intimidating, but the idea behind it is simple once you see it worked through month by month — which is what the rest of this page does.
Why it isn’t “principal + total interest, divided by months”
A common mental shortcut is: “I’m borrowing ₹8,00,000 at 9% for 5 years, so interest is roughly ₹8,00,000 × 9% × 5 years, plus the principal, divided by 60 months.” That gives roughly ₹19,333 a month. The real reducing-balance EMI for the same loan is ₹16,607 — noticeably different.
The shortcut is wrong because it treats interest as if it’s charged once on the full amount for the whole tenure (a “flat rate” calculation). Reducing-balance interest is charged only on what you still owe, every month — and what you still owe keeps shrinking as you pay it down. See how loan interest behaves for a deeper comparison of flat vs. reducing-balance interest.
Worked example, step by step
Take a ₹8,00,000 loan at 9% annual interest over 60 months (5 years):
| Monthly interest rate (r) | 9% ÷ 12 ÷ 100 = 0.007500 |
|---|---|
| Number of installments (n) | 60 |
| EMI | ₹16,607 |
Month 1: interest = ₹8,00,000 × 0.007500 = ₹6,000. Principal paid off = ₹16,607 − ₹6,000 = ₹10,607. New balance = ₹8,00,000 − ₹10,607 = ₹7,89,393.
Month 2 repeats the same steps, but interest is now calculated on ₹7,89,393 instead of the original ₹8,00,000 — so the interest portion drops to ₹5,920, and a little more of the EMI (₹10,686) goes toward principal.
This repeats every month for all 60 installments. Across the full loan, total interest works out to ₹1,96,401, making total repayment ₹9,96,401. You can see every one of the 60 months laid out individually in an amortization schedule.
The zero-interest special case
If the interest rate is exactly 0%, the formula above involves dividing by zero and breaks down mathematically. In that case EMI is simply the loan amount divided evenly by the number of months — there’s no interest to reduce, so there’s nothing to compound.
Try it with your own numbers
Enter your own loan amount, rate, and tenure in the EMI calculator to see this same formula applied to your situation, along with the full month-by-month breakdown.