A reducing-balance loan charges interest on what you still owe. It does not charge interest on the original amount for the whole tenure. Each month the interest is the opening balance times the monthly rate. The monthly rate is the yearly rate divided by 12. The EMI stays the same if the rate and the tenure stay the same. Whatever is left after the interest reduces the principal. Next month the balance is smaller, so the interest is smaller.
That is why the first year of a home loan is mostly interest, and the last year is mostly principal. Nothing in the later years is a reward from the bank. The interest is smaller only because you owe less. A flat-rate loan does the opposite kind of sum: interest is worked on the original amount for the whole term, which makes a low-looking rate more expensive than it sounds. A home loan in India is priced on the reducing balance. If a lender quotes a flat rate, ask for the reducing-balance equivalent before you compare it with a home-loan card.
An extra payment cuts the balance. Later months are then charged on less money. On a floating-rate home loan to an individual for a non-business purpose, sanctioned or renewed on or after 1 January 2026, the Reserve Bank’s directions say the lender cannot levy a prepayment charge. A fixed-rate loan can still carry a charge if the sanction letter disclosed it.
A worked example
The EMI engine takes ₹50,00,000 at 8.25% for 20 years. The monthly payment is ₹42,603. Total interest is ₹52,24,892.
Year one charges ₹4,08,680 of interest and only ₹1,02,556 of principal. The ending balance is still close to what you borrowed. That is the reducing-balance table in one year. Run the EMI calculator and read the later years. The principal column rises. The interest column falls. The payment column stays put until the rate changes.
The prepay versus invest calculator uses the same balance. It compares cutting that balance with investing the extra money. The EMI guide writes the monthly step in words.
Mistakes people make
- Comparing a flat rate with a reducing-balance rate as if the percentages meant the same cost.
- Expecting the EMI to shrink every month because the balance shrank. The split changes. The EMI does not, unless the rate or the tenure is reset.
- Believing the bank “front-loads” interest as a penalty. The first year is large because the balance is large.
- Prepaying a fixed-rate loan without reading the charge in the sanction letter.
- Using the original loan amount, years later, to estimate the interest you could save. Use the balance you still owe.
What to read
The arithmetic is the reducing-balance EMI, not a tax section. The prepayment rule for a floating-rate individual loan is the Reserve Bank’s Pre-payment Charges on Loans Directions, 2025. Tax on the interest, if you claim it, is section 22 (this was section 24(b)), and only in the old regime.
Questions
Is a home loan in India a reducing-balance loan?
A standard home-loan EMI is. Interest each month is the opening balance times the monthly rate. On ₹50,00,000 at 8.25%, year one is ₹4,08,680 of interest. A flat-rate loan, which charges interest on the original amount, is a different product.
Why does prepaying early save more?
An extra payment cuts the balance that later months use for interest. The full 20-year interest on the example is ₹52,24,892. Cutting the balance in year one removes interest on that cut for every later month.
Does the EMI fall when the balance falls?
Not by itself. The EMI stays fixed if the rate and the tenure stay fixed. What changes is the split. Later years put more of the same ₹42,603 toward principal.
Sources
Figures checked 28 Oct 2026.