An Equated Monthly Instalment (EMI) is a fixed amount paid by a borrower to a lender on a specified date each month. In India, EMIs are standard for retail credit — home loans, car loans, personal loans, education loans — and are calculated using the reducing balance method under RBI guidelines.
Formula
EMI = P × R × (1+R)ⁿ / ((1+R)ⁿ − 1)
Where P is the principal, R is the monthly interest rate (annual rate ÷ 12 ÷ 100), and n is the tenure in months.
Components of every EMI
- Principal portion — repays the borrowed amount
- Interest portion — pays the lender for the use of capital
In the reducing-balance method, interest is computed on the outstanding principal each month, so the principal portion grows and interest portion shrinks over the loan tenure.