How EMI Is Actually Calculated (And Why Your Bank’s Number Differs)

Every lender quotes an EMI, few explain it. The formula is short enough to fit on one line, and understanding it tells you exactly where your money goes each month.

The formula

EMI is the payment that amortises a principal P over n months at a monthly rate r:

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

The monthly rate r is the annual rate divided by twelve, expressed as a decimal. An 8.5% loan gives r = 0.085 / 12 = 0.00708.

Try it on a real number

Take a ₹10,00,000 loan at 8.5% over five years. Rather than reach for a spreadsheet:

Why your bank's figure differs

• Day-count conventions. Some lenders accrue interest daily rather than monthly, which shifts the total slightly.
• Processing fees folded into the principal. A 1% fee on ₹10 lakh adds ₹10,000 before the first EMI is computed.
• Rounding. Banks round the EMI up to the nearest rupee, then adjust the final instalment.

What the split looks like over time

In month one, most of the EMI is interest. By the final year, almost all of it retires principal. That crossover is the single most useful thing to understand about a loan — it is why prepaying early saves far more than prepaying late.

A prepayment in year one of a twenty-year loan removes twenty years of compounding on that rupee. The same prepayment in year nineteen removes one.