BankPulse Academy

What is an EMI? (Equated Monthly Instalment)

An EMI is a fixed monthly payment that repays a loan's interest and principal over a set term.

Written 08 September 2026. For bankers in India.

In one line

An EMI is one fixed monthly payment. It pays the month's interest first. What is left reduces the principal.

Why it matters to you

Every retail loan file has one. The EMI is the number the borrower feels, and the number you test.
It decides eligibility. The income tests compare the EMI against income. A wrong EMI gives a wrong sanction.
It hides a split. Early EMIs are mostly interest. Borrowers learn this only at a closure request.
RBI checks the disclosure. A key facts sheet must carry the annual cost and the full repayment table.
A rate change moves it. On a floating rate loan, either the EMI or the term must change.

How it works

The EMI is level. The amount is the same every month for the whole term. What changes is the split inside it.

The bank fixes three things at sanction: the loan amount, the yearly rate and the term.
Interest for a month is charged on the balance standing at the start of that month.
The EMI pays that interest first. Whatever is left reduces the principal.
Next month the balance is smaller. So the interest part is smaller and the principal part is larger.
The last EMI clears the final balance. Nothing is left after it.

The formula in words. Find the level monthly amount that brings the balance to zero in the last month.

The formula in symbols.

E = P x r x (1 + r)^n / ((1 + r)^n - 1)

E is the EMI, in rupees.
P is the loan amount at the start, in rupees.
n is the number of months in the term.
r is the monthly rate. Take the yearly rate, divide by 12, then divide by 100.

At 8.5 per cent a year, r is 8.5 divided by 12 divided by 100. That is 0.00708333 and it repeats.

Shown rounded, r is 0.0070833. Use the full figure in a calculator, not the rounded one.

Worked examples

Every figure below was computed by machine on 8 September 2026. The rates are only for teaching.

Example 1: a home loan of Rs 30 lakh

Loan Rs 30,00,000. Rate 8.5 per cent a year. Term 20 years, which is 240 months.
The EMI works out to Rs 26,035.
Month one interest is Rs 30,00,000 times 0.0070833, which is Rs 21,250.
Month one principal is Rs 26,035 less Rs 21,250, which is Rs 4,785.
After 12 EMIs the balance is Rs 29,40,293. Only Rs 59,707 of principal has been repaid.
In month 240 the interest is Rs 183 and the principal is Rs 25,852.
Total paid over the term is Rs 62,48,327. Of that, Rs 32,48,327 is interest.
That total assumes the rate never moves and nothing is prepaid. Few loans run that way.

Example 2: a personal loan of Rs 5 lakh

Loan Rs 5,00,000. Rate 14 per cent a year. Term 3 years, which is 36 months.
The EMI works out to Rs 17,089.
Month one interest is Rs 5,833. Month one principal is Rs 11,255.
Total paid is Rs 6,15,197. Of that, Rs 1,15,197 is interest.
The term is short, so the principal falls fast from the first month.

Example 3: what a rate rise does to the same home loan

Take the loan in example 1. After 24 EMIs the balance is Rs 28,75,309.
That figure uses the exact EMI of Rs 26,034.70, not the rounded Rs 26,035.
A bank that collects the rounded Rs 26,035 reaches Rs 28,75,301, which is Rs 8 less.
Both are right. Say which EMI you used, and a checker will get your number.
The rate now moves from 8.5 to 9.5 per cent a year. There are 216 months left.
Hold the term at 216 months. The EMI rises to Rs 27,830, which is Rs 1,796 more.
Hold the EMI at Rs 26,035 instead. The loan then needs 264 months, which is 48 months more.
Put both numbers in front of the borrower. The circular of 18 August 2023 asks for that choice.
Ask your bank whether its board policy also lets this borrower move to a fixed rate.

What the rule says

RBI RULE. RBI does not fix the EMI amount. It fixes how interest is charged and what you must disclose.

A bank charges interest on all advances at monthly rests. See paragraph 4(a)(vii) of the 2016 Directions.
Farm loans follow older circulars named in that same paragraph.
The key facts sheet circular of 15 April 2024 sets the meaning of the annual percentage rate and of the instalment.
Paragraph 6 of that circular asks the lender to give a rate sheet and the full repayment table.
Paragraph 11 applies it to new retail and small business term loans sanctioned from 1 October 2024.
The floating rate circular of 18 August 2023 asks the lender to offer a choice when the rate resets.
The choice is a higher EMI, a longer term, or both. The borrower may also prepay.
The same paragraph 2 covers a fourth choice: moving from a floating rate to a fixed rate.
On that one the words are weaker. The lender may offer it, under its own board approved policy.
The board policy also sets how many times in the life of a loan the borrower may switch.
Any charge for the switch must be written in the sanction letter. So must the other charges.
The circular also bars what it calls negative amortisation, in those words.
In plain words: a longer term must not leave the balance growing instead of falling.
That happens when the EMI is smaller than the interest for the month.
The lender must also send a statement every quarter, showing principal and interest recovered.
The statement shows the EMIs left and the rate for the rest of the term.
The words personal loans in that circular are not the everyday meaning. They are wider.
Their meaning comes from the harmonised definitions circular of 4 January 2018.
Under it, personal loans are loans to an individual. Four kinds are named.
They are consumer credit, education loans, loans to buy or build a house, and loans to buy shares.
So a housing loan to an individual is covered. Example 3 below rests on that.
RBI's own answers on this circular say the same. Answer 1 gives the definition.
Answer 8 deals with a housing loan given by an urban co-operative bank.
A loan to a business is not covered. The circular says it applies to personal loans only.
For commercial banks the same meanings sit in the Responsible Business Conduct Directions, 2025.
Paragraph 4(3) is the annual percentage rate. Paragraph 4(11) is the equated periodic instalment.
Paragraph 4(18) is the key facts statement. We read all three.
Paragraph 5(3)(iv) asks the bank's board to have a policy on resetting a floating rate.
That policy must cover the borrower's option to switch between fixed and floating.

BANK PRACTICE. The rate, the term, the EMI date and the rounding are set by each bank's own policy.

BANKPULSE VIEW. We could not read the repeal list of the 2025 Directions. Treat both papers as live.

Common mistakes

Using the yearly rate as the monthly rate. Divide by 12 and by 100 first, or the EMI is far too high.
Putting years in the power. The letter n is the number of months, not the number of years.
Saying the EMI repays equal principal. It does not. In early months it is mostly interest.
Quoting only the interest rate. The annual percentage rate adds the fees. The rate alone understates cost.
Working out a closure figure by hand. Ask the system for the balance on the date of closure.
Forgetting the broken period. Interest from the release date to the first EMI date is charged on its own.

How to use it at your desk

Write down the loan amount, the yearly rate and the term in months.
Compute the EMI on your bank's own system. Do not sanction on a figure from a website.
Check month one by hand: balance times yearly rate, divided by 1200. That is the interest part.
Subtract that from the EMI. If the answer is not positive, the EMI is too small. Raise it.
Run the income test on the exact EMI, not on a rounded figure.
Give the borrower the key facts sheet and the repayment table before he signs.
On a floating rate loan, show what one per cent more would do to the EMI and the term.

Related terms

Reducing balance rate and flat rate — the formula above is a reducing balance EMI. A flat rate works differently.
Moratorium and pre-EMI — a moratorium delays the EMI. Pre-EMI pays interest only.
Step-up EMI — a step-up EMI is not level. It starts lower and rises at fixed times.
FOIR — FOIR (Fixed Obligation to Income Ratio) tests this EMI with every other fixed payment.
Bullet payment — a bullet loan has no EMI. The whole principal falls due on one day.
Housing loan rules — the BankPulse page for home loans, where most EMI questions start.
Personal loan rules — the BankPulse page for personal loans, where short terms are common.