How your EMI is calculated — the formula, and four ways to pay less interest

The formula

EMI = P × r × (1 + r)^n ÷ ((1 + r)^n − 1), where P is the principal, n is the number of months, and r is the monthly interest rate — the annual rate divided by 12, then by 100. A ₹30,00,000 loan at 9% for 20 years (240 months) has r = 0.0075 and an EMI of about ₹26,992.

Why early EMIs are mostly interest

Each month, interest is charged on the outstanding balance. Early on the balance is large, so most of the EMI goes to interest and little to principal. As the balance falls, the interest portion shrinks and the principal portion grows. On that 20-year loan, roughly the first month is ₹22,500 interest and ₹4,492 principal; by year 15 it has flipped.

This is why prepaying early saves far more than prepaying late — you remove principal before years of interest can accrue on it.

Four ways to cut the total interest

1. Prepay in the first third of the tenure. Even one extra EMI a year can knock years off a home loan.
2. When you prepay, keep the EMI the same and reduce the tenure — not the reverse. Reducing tenure saves more interest.
3. Round the EMI up. Paying ₹28,000 instead of ₹26,992 is a small monthly stretch that compounds.
4. Refinance if a competitor's rate is 0.5%+ lower and the balance and remaining tenure are large enough to beat the switching cost.

Floating vs fixed

Most Indian home loans are floating, linked to the RBI repo rate. When the rate changes, banks usually keep the EMI fixed and change the tenure; ask them to reset the EMI instead if you would rather finish on schedule.