Understanding how your Equated Monthly Installment (EMI) is calculated helps you make smarter borrowing decisions. At Today Finserv Consulting India, we break down complex financial calculations into simple terms for better financial planning.
The EMI Calculation Formula
The standard mathematical formula used by banks and financial institutions is:
EMI = [P × R × (1+R)^N] ÷ [(1+R)^N – 1]
Where:
P = Principal loan amount
R = Monthly interest rate (Annual Rate ÷ 12)
N = Loan tenure in months
Example Calculation:
For a ₹10 lakh loan at 9% annual interest for 5 years (60 months):R = 9%/12 = 0.75% = 0.0075
EMI = ₹20,758 per month
- Step-by-Step EMI Calculation
Let’s break down the calculation process:Convert annual rate to monthly rate
(Annual Interest Rate ÷ 12) ÷ 100Calculate the growth factor
(1 + R)^NMultiply principal by growth factor
P × R × (1+R)^NDivide by the reducing factor
[(1+R)^N – 1]
Components of Your EMI
Every EMI payment consists of two parts that change over time:
Payment Month Principal
First EMI ₹12,758
Middle EMI ₹16,492
Last EMI ₹20,592
Key Insight: Early EMIs pay more interest, while later EMIs repay more principal.
Factors Affecting EMI Amount
Factor Impact
Loan Amount Directly proportional
Interest Rate Directly proportional
Loan Tenure Inversely proportional
EMI Calculation Methods
Flat Interest Rate Method
Older calculation method
Interest calculated on full principal for entire tenure
Results in higher effective interest rate
Rarely used today
Reducing Balance Method
Modern standard method
Interest calculated on outstanding principal
More borrower-friendly
Used by most banks/NBFCs
EMI Calculation Tools
Manual Calculation (using the formula)
Excel/Google Sheets (using PMT function)
Online EMI Calculators (instant results)
Bank Calculators (specific to their products)
Why does my EMI remain same but interest-principal ratio changes?
This is due to the amortization process – early payments cover more interest as the outstanding principal is higher initially.
How does prepayment affect EMI calculation?
Prepayments:
Reduce principal amount
Can either:
a) Reduce EMI (same tenure)
b) Reduce tenure (same EMI)
Are there different EMI calculation methods?
Yes, but 99% of Indian lenders use the reducing balance method. Some informal lenders may use flat rate method.
How accurate are online EMI calculators?
They’re highly accurate for fixed-rate loans. For floating-rate loans, they provide estimates that may change with rate revisions.
Can I negotiate my EMI amount with lenders?
Yes, by:
Negotiating interest rates
Adjusting loan tenure
Making down payments to reduce principal
Smart EMI Planning with Today Finserv
At Today Finserv Consulting India, we help you:
✔ Calculate precise EMIs for any loan scenario
✔ Compare loan offers using effective interest cost
✔ Structure EMIs to match your cash flow patterns
✔ Plan prepayments to minimize total interest
