Amortisation

Amortisation, in the context of loans, is the process of paying off debt through regular scheduled payments (EMIs) over time. Each payment is structured so that it covers the interest accrued on the outstanding balance and reduces the principal by the remaining amount.

The defining characteristic of a fully amortising loan is that both the interest and the principal are paid with each instalment, such that by the final payment, the loan balance reaches exactly zero. This is in contrast to an interest-only loan (where only interest is paid each period and the principal is repaid as a lump sum at the end).

In accounting, amortisation also refers to the gradual expensing of intangible assets (like patents or goodwill) over their useful lives — similar to how depreciation works for tangible assets. This is the 'A' in EBITDA.

In a standard reducing balance loan (which is how all Indian bank loans are structured):

Interest for month t = Outstanding Principal × Monthly Interest Rate

Principal repaid in month t = EMI − Interest for month t

Outstanding Principal after month t = Previous Principal − Principal Repaid

The EMI itself is calculated using: EMI = P × r × (1+r)^n / ((1+r)^n − 1)

You take a personal loan of ₹5,00,000 at 12% per annum for 24 months.

• Monthly rate r = 12/12/100 = 1% = 0.01
• EMI = 5,00,000 × 0.01 × (1.01)^24 / ((1.01)^24 − 1) = ₹23,536/month

First month's amortisation:

• Interest = ₹5,00,000 × 1% = ₹5,000
• Principal repaid = ₹23,536 − ₹5,000 = ₹18,536
• Outstanding balance after Month 1 = ₹5,00,000 − ₹18,536 = ₹4,81,464

Month 12 (midpoint):

• Outstanding balance ≈ ₹2,73,000
• Interest = ₹2,730
• Principal = ₹20,806

Last month: Nearly the full EMI goes toward principal, and the balance reaches zero.

Use the loan amortisation calculator to see the full schedule for your loan.

• Front-loaded interest: Indian bank loans use the reducing balance method, meaning the total interest paid is lower than it would be under the flat-rate method. But even so, the early EMIs are heavily weighted toward interest — which is why prepaying a loan early has maximum impact on total interest savings.
• LTV and equity build-up: As your loan amortises (outstanding balance decreases), the equity you hold in the property increases. This rising equity can be leveraged for a top-up loan or refinancing at a lower rate.
• Floating rate disruptions: When the RBI raises interest rates, floating-rate home loans see an increase in the interest component. Banks typically extend the tenure rather than increase the EMI. This means some months may not reduce the principal at all. Review your amortisation schedule annually.
• Tax planning: The principal component of a home loan EMI qualifies for Section 80C deduction (up to ₹1.5 lakh/year). The interest component qualifies under Section 24(b) (up to ₹2 lakh/year for self-occupied property). The amortisation schedule shows exactly how much you can claim each year.
• Prepayment timing: The sooner you prepay, the more interest you save — because prepayment reduces the principal on which future interest is calculated. Prepaying in Year 1 saves far more than prepaying in Year 10 of a 20-year loan.