What is EMI?
EMI stands for Equated Monthly Installment. It is the fixed amount you pay to the bank every month to repay a loan. Each EMI has two parts: interest on the outstanding loan and repayment of the principal. In the early years, the interest part is bigger; as the loan reduces, the principal part increases.
EMI calculation formula
EMI = P × r × (1 + r)^n / [ (1 + r)^n − 1 ]
- P = Loan amount (principal)
- r = Monthly interest rate (yearly rate ÷ 12 ÷ 100)
- n = Loan tenure in months
Example: A home loan of ₹25,00,000 at 8.5% for 20 years has an EMI of about ₹21,696. Over 20 years you pay around ₹27,07,000 as interest.
How to use the EMI calculator
- Select the loan type: home, car or personal loan.
- Enter the loan amount you need.
- Enter the interest rate offered by the bank.
- Choose the tenure in years.
- See your monthly EMI, total interest and total payment. Click on “Show year-wise schedule” to see how the loan reduces every year.
Factors that affect your EMI
- Loan amount: higher loan means higher EMI.
- Interest rate: even a 0.5% difference changes the total interest a lot on long loans.
- Tenure: longer tenure reduces EMI but increases total interest paid.
- Prepayment: paying extra amount reduces the principal and saves interest.
Tips to reduce your loan burden
- Compare interest rates from multiple banks before taking a loan.
- Keep EMI below 40% of your monthly income.
- Make part-prepayments whenever you get a bonus or extra money.
- Choose a shorter tenure if you can afford a higher EMI.
Frequently asked questions
What is a good EMI to income ratio?
Banks generally prefer that all your EMIs together do not exceed 40% to 50% of your monthly take-home income.
Does the EMI change if the interest rate changes?
For floating rate loans, banks usually keep the EMI same and change the tenure. You can ask the bank to change the EMI instead.
Is there a penalty for prepaying a loan?
There is no prepayment penalty on floating rate home loans for individuals. Fixed rate loans and personal loans may have a charge of 2% to 5%.
What is the difference between flat rate and reducing balance rate?
In reducing balance, interest is charged only on the outstanding loan and the EMI formula above applies. In flat rate, interest is charged on the full loan for the whole tenure, which is much costlier. Always compare using the reducing balance rate.
Can I get tax benefit on loan EMI?
For home loans under the old tax regime, principal repayment gets deduction under Section 80C (up to ₹1.5 lakh) and interest under Section 24(b) (up to ₹2 lakh for self-occupied house).
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