# How EMI Is Calculated: The Formula, Explained Simply

> How EMI is calculated with the reducing-balance formula — what each part means, a worked ₹10,00,000 example, and why early instalments are mostly interest.

_By emi.me Editorial · Reviewed by emi.me Editorial · Updated 2026-06-24_
Source: https://emi.me/learn/how-emi-is-calculated/

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Your EMI is calculated with one formula: **EMI = P · r · (1 + r)ⁿ ÷ ((1 + r)ⁿ − 1)**, where **P** is the amount you borrow, **r** is the monthly interest rate (the annual rate divided by 12 and by 100), and **n** is the number of monthly instalments. It produces a fixed monthly payment that clears your loan — principal plus interest — by the end of the term. Everything else about EMIs is just the consequences of this one equation.

## The reducing-balance formula

Almost every retail loan — home, car, personal, two-wheeler — uses the **reducing-balance** method. "Reducing balance" means interest each month is charged only on the amount you *still owe*, not on the original loan amount. As you repay, the balance falls, so the interest portion of each instalment falls too.

```
EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1)
```

The three inputs are the only things that determine your EMI:

- **P — principal:** the amount borrowed. EMI scales directly with it: double the loan, double the EMI.
- **r — monthly rate:** the annual rate ÷ 12 ÷ 100. A 9% loan has r = 0.0075.
- **n — tenure in months:** a longer tenure lowers the EMI but, as we'll see, raises total interest.

If the rate is 0% (a genuine no-cost EMI), the formula can't divide by zero — it simplifies to **P ÷ n**, the principal split evenly.

## A worked example

Take a **₹10,00,000** loan at **9% a year** for **10 years (120 months)**.

The monthly rate is 9 ÷ 12 ÷ 100 = **0.0075**. Put P = 10,00,000, r = 0.0075 and n = 120 into the formula and you get an EMI of about **₹12,668**. Over the full 120 months you repay roughly **₹15,20,109** — that's your ₹10,00,000 principal plus about **₹5,20,109** of interest.

You don't have to do this by hand — the [EMI calculator](/calculators/emi/) above is pre-filled with exactly these numbers, and you can change any input to see the EMI update instantly.

## Why early instalments are mostly interest

Here's the part that surprises most borrowers. Although the EMI is constant, its split between interest and principal shifts dramatically over time. Watch what happens to that ₹12,668 instalment on the loan above:

| Instalment | Interest | Principal |
| --- | --- | --- |
| Month 1 | ₹7,500 | ₹5,168 |
| Month 60 | ₹4,637 | ₹8,031 |
| Month 119 | ₹188 | ₹12,480 |

In month one, interest is the full balance times the monthly rate: ₹10,00,000 × 0.0075 = **₹7,500**, leaving only ₹5,168 to reduce the principal. By month 119 the balance is tiny, so almost the entire instalment is principal. This front-loading of interest is exactly why **prepaying early saves so much** — you remove principal before it has years to accrue interest. See [how prepayment reduces your EMI](/learn/how-prepayment-reduces-emi/) for the numbers.

## The three levers you control

Because only P, r and n drive the EMI, there are only three levers:

1. **Principal** — a bigger down payment shrinks P, and the EMI with it.
2. **Rate** — even [a small rate difference](/learn/how-interest-rate-affects-emi/) moves total interest a lot over a long tenure.
3. **Tenure** — [a longer tenure](/learn/how-loan-tenure-affects-emi/) lowers the monthly EMI but increases the total you repay.

The art of managing a loan is balancing an EMI you can comfortably afford against the total interest you'll pay — and the calculator makes that trade-off visible.

## Watch out for "flat rate"

If a lender quotes a rate that looks suspiciously low, check whether it's a **flat rate**. A flat rate charges interest on the *entire original amount* for the whole tenure, ignoring the fact that you're steadily paying the loan down. A 10% flat rate can be equivalent to roughly an 18% reducing-balance rate. Always convert before you compare — [flat rate vs reducing balance](/learn/flat-rate-vs-reducing-balance/) shows exactly how.

Once you understand this one formula, every other EMI question — prepayment, tenure, foreclosure, no-cost EMI — is just a variation on the same maths.