India tax and savings
How Is EMI Calculated?
An EMI (equated monthly instalment) is a fixed monthly payment that covers the interest due on the outstanding balance plus a slice of principal. A ₹30 lakh home loan at 8.5% for 20 years has an EMI of ₹26,035, and you pay ₹32,48,327 in interest over the life of the loan, 52.0% of everything you repay.
Last updated: October 20, 2026
The EMI formula
EMI = P × r × (1 + r)n ÷ ((1 + r)n − 1)
P = loan amount, r = annual interest rate ÷ 12 ÷ 100 (the monthly rate), n = number of monthly instalments.
For ₹30,00,000 at 8.5% over 20 years: r = 8.5 ÷ 1200 = 0.0070833 and n = 240. Plugging these in gives ₹26,035 a month.
Why the early EMIs are mostly interest
Banks in India use the reducing-balance method: each month, interest is charged only on what you still owe. In month one, interest is ₹30,00,000 × 8.5% ÷ 12 = ₹21,250, so only ₹4,785 of the ₹26,035 EMI reduces the principal. As the balance falls, the interest part shrinks and the principal part grows, which is why the balance drops slowly at first and quickly near the end.
How tenure changes the EMI and total interest
A longer tenure lowers the EMI but sharply increases the interest you pay. Same ₹30 lakh loan at 8.5%:
₹30 lakh at 8.5%
| Tenure | EMI | Total interest | Total paid |
|---|---|---|---|
| 10 years | ₹37,196 | ₹14,63,485 | ₹44,63,485 |
| 15 years | ₹29,542 | ₹23,17,594 | ₹53,17,594 |
| 20 years | ₹26,035 | ₹32,48,327 | ₹62,48,327 |
| 25 years | ₹24,157 | ₹42,47,044 | ₹72,47,044 |
| 30 years | ₹23,067 | ₹53,04,266 | ₹83,04,266 |
Going from 20 to 30 years cuts the EMI by about ₹2,967 a month but adds roughly ₹20.6 lakh of interest.
What a prepayment does
A part-prepayment goes straight to principal. If you prepay ₹2 lakh after the first year and keep paying the same EMI, the loan ends about 34 months earlier and you save roughly ₹6.9 lakh in interest. Most lenders let you choose between a shorter tenure (saves more interest) or a lower EMI. The RBI does not allow banks and NBFCs to charge prepayment or foreclosure penalties on floating-rate loans taken by individuals for non-business purposes.
When the floating rate changes
Most home loans are linked to an external benchmark such as the repo rate, so the rate resets when the benchmark moves. If the rate on the example loan rises from 8.5% to 9%, the EMI would rise to about ₹26,992; if the bank keeps the EMI unchanged instead, the tenure stretches to about 267 months instead of 240. RBI rules require lenders to tell you about a reset and to offer a choice between a higher EMI, a longer tenure, or a mix, and the option to switch to a fixed rate.
Flat rate versus reducing balance
Some personal and vehicle loans are quoted at a flat rate, where interest is charged on the original amount for the whole term. A flat 8.5% on ₹30 lakh for 20 years would mean ₹51.0 lakh of interest, far more than the ₹32,48,327 under reducing balance. A flat rate is roughly equivalent to a reducing rate close to double, so always compare loans on the reducing-balance rate or the APR shown in the Key Facts Statement.
Tax benefits on a home loan EMI
Under the old tax regime, interest on a loan for a self-occupied home is deductible up to ₹2 lakh a year, and principal repayment counts toward the ₹1.5 lakh deduction limit for investments. The new tax regime does not allow these deductions for a self-occupied home. Compare both regimes before choosing.
Key takeaways
- EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), with r the monthly rate and n the number of months.
- ₹30 lakh at 8.5% for 20 years: EMI ₹26,035, total interest ₹32,48,327.
- Early EMIs are mostly interest; the principal share rises every month.
- A longer tenure lowers the EMI but raises total interest a lot.
- Prepaying early, while keeping the EMI unchanged, saves the most interest.
Frequently asked questions
Is EMI calculated on a daily or monthly basis?
The EMI is fixed using a monthly rate, but many banks accrue interest daily on the outstanding balance. The difference is small; the formula above matches lender schedules closely.
Does the EMI include processing fees and insurance?
No. Processing fees, insurance premiums, and other charges are separate unless they are added to the loan amount. Check the Key Facts Statement for the all-in cost.
Should I reduce EMI or tenure after a prepayment?
Reducing the tenure saves more interest. Reducing the EMI improves monthly cash flow. If you can afford the current EMI, choose the shorter tenure.
What is a pre-EMI?
For an under-construction property, the bank may disburse the loan in stages and charge interest only on the amount released. That interest-only payment is the pre-EMI; full EMIs start after final disbursement.
Sources: Reserve Bank of India, Income Tax Department