An EMI, or equated monthly instalment, is a fixed monthly payment that repays a loan over a set tenure. Each instalment contains interest on the outstanding balance and a slice of principal. Early on, most of the payment is interest; later, most of it is principal. A ₹10 lakh home loan at 9% for 20 years has an instalment of about ₹8,997, and in the very first month ₹7,500 of it is interest and ₹1,497 reduces the principal.
This guide explains the formula, how the split changes over time, and what India’s Reserve Bank rules say when a floating rate changes.
What is the EMI formula?
The standard formula is:
- EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
P is the principal, r is the annual interest rate divided by 12, and n is the number of monthly instalments.
Worked example:
- P = ₹10,00,000
- Annual rate = 9%, so r = 0.09 ÷ 12 = 0.0075
- Tenure = 20 years, so n = 240
- (1.0075)^240 = 6.0092
- EMI = 10,00,000 × 0.0075 × 6.0092 ÷ (6.0092 − 1) = 45,069 ÷ 5.0092 ≈ ₹8,997
Over 240 months you pay ₹8,997.26 × 240 ≈ ₹21.59 lakh, of which about ₹11.59 lakh is interest. Try your own figures in the EMI calculator.
How does each instalment split between interest and principal?
Interest for a month is the outstanding balance multiplied by the monthly rate. In month one that is ₹10,00,000 × 0.0075 = ₹7,500, so ₹8,997 − ₹7,500 = ₹1,497 goes to principal. The balance falls to ₹9,98,503. In month two interest is ₹9,98,503 × 0.0075 = ₹7,489, and principal rises to ₹1,508. This continues until the final instalments are almost all principal. The instalment stays the same; only the mix changes.
What happens to the payment when a floating rate rises?
On a floating-rate loan, a rate increase means either a higher instalment or more instalments. Using the example, if the rate rises to 9.5% at the start:
- Keep the tenure at 20 years: the instalment rises to about ₹9,321, up ₹324
- Keep the instalment at ₹8,997: the tenure stretches to about 269 months, roughly 29 months longer
The longer tenure looks painless but costs more interest overall.
What do RBI rules say about EMI resets?
The Reserve Bank of India’s circular of 18 August 2023 on reset of floating interest rates on EMI-based personal loans, updated in 2025, requires lenders to:
- Explain at sanction how a benchmark change could alter the instalment, the tenure or both, and tell borrowers promptly of any increase
- Give borrowers the choice of a higher instalment, a longer tenure or a combination, and the option to prepay in part or in full at any time
- Disclose any charges for switching from floating to fixed rates or for exercising these options
- Make sure tenure extensions do not cause negative amortisation, where the instalment no longer covers the interest
- Share a quarterly statement showing principal and interest recovered, the EMI amount, the number of instalments left and the annualised rate
Lenders may, at their option, offer a switch to a fixed rate at reset. If your lender lengthened your tenure without telling you, these rules are the basis for asking for a review.
Can I prepay to reduce my EMI or tenure?
Yes. Prepayment cuts the outstanding principal, so you can either keep the same instalment and finish sooner or keep the tenure and lower the instalment. Under the RBI’s Pre-payment Charges on Loans Directions, 2025, for floating-rate loans sanctioned or renewed from 1 January 2026, lenders cannot levy pre-payment charges on loans to individuals for purposes other than business. For existing loans, check your sanction letter and lender’s policy.
Reducing tenure usually saves more interest than reducing the instalment. See the effect with the loan calculator, and compare total interest using the simple interest calculator for short-term borrowing.
Is a lower instalment always better?
No. A lower instalment through a longer tenure means more total interest. On the ₹10 lakh example, the 20-year EMI is ₹8,997 with about ₹11.59 lakh of interest. A shorter tenure raises the monthly instalment but can cut interest by lakhs. Choose the shortest tenure you can comfortably afford, keeping some margin for higher rates later. In practice, choose the shortest tenure whose instalment leaves room for savings and emergencies. Lenders also assess affordability by comparing your total instalments with your income, so a smaller instalment may help you qualify, but it should not be the only goal.
How does the instalment compare across loan types?
The same formula applies to home, car, personal and education loans. Differences come from the rate, tenure and fees. Credit card EMI conversions work the same way but often add processing fees, so check the effective cost with the APR calculator. For home loans, the mortgage calculator adds taxes and insurance for markets where those are collected monthly.
Before signing, ask the lender for a full repayment schedule. It should list every instalment with its interest and principal split and the balance after each payment, so you can check it against your own calculation and spot fees that were not explained.
Once you know the formula and the interest-principal split, you can check any lender’s instalment, plan prepayments and respond calmly when rates reset.
Sources
- RBI: Reset of floating interest rate on EMI-based personal loans
- RBI: Pre-payment Charges on Loans Directions, 2025
FAQ
What does “How Does an EMI Loan Payment Work?” explain?
An EMI, or equated monthly instalment, is a fixed monthly payment that repays a loan over a set tenure. Each instalment contains interest on the outstanding balance and a slice of principal. Early on, most of the paymen…
How should I use this guide with a calculator?
Read the definitions and assumptions first, then open the linked calculator with the same inputs. Treat results as estimates, not professional advice.
Is this financial or medical advice?
No. Calcenzo content is educational. Confirm important decisions with a qualified professional and official sources for your situation.