What is the formula of EMI calculation by Indian banks and how it works?

The EMI that all Indian banks (SBI, HDFC, ICICI, Axis, etc.) use is: EMI = (P × r × (1 + r) n)/(1 + r n -1) where P = Principal loan amount in rupees, r= Monthly interest rate (annual rate/12/100), and n = Loan tenure in months. As an example, in a 20 year home loan of 20 lakh at an interest rate of 9 per year: r = 9/12/100 = 0.0075, EMI = (2000000 × 0.0075 × (1.0075) 240)/(1.0075 240-1) = 17997. It is a formula that employs the methodology of the compound interest approach whereby interest is computed on a decreasing balance after every month. At first, the majority of EMI is directed towards interest; a steady growth of principal component. Total payment = EMI × tenure = ₹17,997 × 240 = ₹43,19,280. Total interest = Total payment-Principal = 2319280-2000,000= 2319280. The formula used in GearsKit EMI calculator is that which is required by the RBI and which guarantees 100 percent accuracy just like the bank calculations.

What is the formula of calculating compound interest of FD, PPF, and investment returns in India?

Compound Interest Formula: A = P(1 + r/n) 1(nt), where A = Final amount (maturity value), P = Principal (initial investment), r = Annual interest rate (as a decimal), n = Compounding frequency per year, t = Years. Indian Examples: (1) BANK FD: 1,00,000 at 7 per cent quarterly compounded: n=4, r=0.07, A = 100000(1 + 0.07/4) =(1.0175) 20 = 1,41, 478. Interest earned = ₹41,478. (2) PPF: 1,50,000 deposited per annum at 7.1per cent during 15 years: Compounded per annum (n=1), by use of formula of annuity, since deposits made per annum, FV = 150000x( 0.07115 -1)/0.071) = 4010351. To compute the SIP, we will assume that the annual interest rate is 12%. We shall assume that the annual interest rate is 12% to compute the SIP. Investment = ₹12,00,000, Returns = ₹11,23,391. The frequency of compounding counts: quarterly compounding will produce more than annual; monthly than quarterly. GearsKit offers special FD, PPF, SIP calculators whose calculation of compound interest is accurate on all Indian investment products.

What is the most important personal finance management financial formula in India?

Compound Interest formula is probably the most important to Indians: Future Value = Present Value × (1 + interest rate)^time. Why important: (1) SAVINGS GROWTH: The difficulty with this is to demonstrate how a small savings can be expanded exponentially with time, i.e. 10,000/month SIP at 12 percent will grow to 1 Crore in 20 years because of compounding. (2) LOAN COST: It shows the real cost of long term loans. 20L home loan with 9% interest rate over 20 years, 23.2L interest - higher than the loan - no wonder. (3) RETIREMENT PLANNING: Shows that one needs to begin early. The difference between 25 and 35 years old in starting age would translate to 2-3X bigger retirement corpus because of the additional 10 years of compounding. (4) INFLATION EFFECT: The 1 lakh purchased today will only have a value of 31,180 in 20 years to come with inflation of 6%. Has to invest in order to maintain the buying power. (5) INVESTMENT COMPARISON: Assists in comparing the FD (7%), PPF (7.1%), equity mutual funds (12-15 percent) and real estate (8-10 percent) on a level playing field. Others: (1) EMI formula used to determine the amount of a loan that can be repaid, (2) Rule of 72 (time to double = 72/interest rate) is a quick formula, and (3) Present Value to assess cash flow in the future, (4) SIP future value to invest to achieve a goal. The 5 formulas will ensure you get 90% of personal financial decisions right.

What are the accuracy of Rule of 72, 114 and 144 to multiply and triple money?

The rule of 72 can be used to give quick, more or less accurate approximations of the doubling time: Years to double = 72/ interest rate. ACCURACY ANALYSIS: 6% rate: Rule 72/6 = 12 years Exact calculation 11.9 years (99.2% accurate). At 8%: Rule 9 years; Exact 9.01 years (99.9% true). At 12 percent: Rule: 6 years; Exact: 6.12 years (98 percent correct). At 18 percent: Rule: 4 years, Exact: 4.19 years (95.5 percent accurate). WHEN ACCURATE TO the largest degree: Interest rates 6-10% (usually FD, PPF, bonds). Inaccurate with very low ( 20%) rates. RULE OF 114 (tripling): Years = 114 ÷ rate. At 8%: 114/8 = 14.25 years; Exact: 14.27 years. RULE Of 144 (four times): Years = rate/ 144. At 12%: 144/12 = 12 years; Exact: 12.0 years. INDIAN EXAMPLES: a FD of 7 cents: money doubles in 10.3 (72/7), triples in 16.3 (114/7) years. PPF doubled at 7.1: Tripled at 10.1, 16.1 years. MF with an equity value of 12% will increase twice in 6 years, thrice in 9.5 years and ten times in 20 years. Limitations: (1) Constant-rate assumption (markets are not constant), (2) taxes omitted (real returns are lower), (3) inflation is not taken into consideration (real are important), (4) discrete compounding only. To be accurate, GearsKit compound interest calculator is used which can deal with variable rates, taxation, inflation-adjustment and continuous compounding.

When should I use NPV vs IRR for investment decisions and business financing?

NPV (Net Present Value) and IRR (Internal rate of Return) are used in the analysis of investment in different ways: NET PRESENT VALUE NPV = (Initial Investment) + (Sum of (Cash Flow)/(1 + discount rate) /(1 + discount rate)period). USE NPV WHEN: (1) Comparing mutually exclusive projects - Select highest positive NPV, (2) Capital rationing - NPV illustrates total NPV within budget, (3) Projects of different sizes - NPV illustrates creation of absolute value, (4) Known discount rate - When you have target rate of return. EXAMPLE: Solar panel at 3L cost which will save 50K every year in 10 years. NPV = (₹50K × 6.145)- 3L = 7 250 and is positive, invest! INTERNAL rate of return: NPV = 0. APPLIED (1) When comparing percentage returns on investments, (2) Unknown discount rate - IRR indicates breakeven rate, (3) Equivalent sized and lengthy projects, (4) Reporting returns to stakeholders (not as difficult as NPV). Same example in the sun: IRR = 11.8% (below 11.8% cost of capital, invest). CONFLICTS & RESOLUTION: An NPV and IRR disagree (different project sizes, timing of cash flows) PREFER NPV since: (1) NPV indicates how wealth is actually created in rupees, (2) NPV assumes realistic reinvestments at the discount rate, (3) IRR can provide multiple values of unconventional cash flows, (4) NPV additive (can add NPVs of projects). INDIAN BUSINESS EXAMPLE: (1) Machinery purchase: NPV can be used to estimate the required WACC discount rate, (2) Real estate: IRR can be used to compare returns on a property, (3) Loan decision: NPV can be used to determine whether to take a loan, (4) Expansion: NPV can be used to determine whether the expansion will add value to the shareholders. GearsKit calculators are required to compute NPV and IRR correctly with Indian inflation and tax consequence.

What do I do to factor in the inflation in calculating investment returns in India?

Purchasing power is destroyed by inflation therefore do not compute nominal returns but rather compute REAL RETURNS (inflation-adjusted). FORMULA: The real rate of return can be calculated as ( (1 + Nominal Return)/(1 + Inflation rate)-1), or simplified as: Real Return = Nominal Return - Inflation rate (close approximation). INDIAN EXAMPLES: (1) BANK FD: FD of 7% on inflation of 6%. Real return = [(1.07/1.06) - 1] = 0.94% only! Barely beating inflation. PF: 7.1% return, 6% inflation = 1.1% real return. Safe but low real growth. E(3) EQUITY MF: 14%(6% inflation) = 7.5% real return. A huge wealth generation. (4) REAL ESTATE: 9% growth and 6% inflation = 2.8% real return (before rental yield). INFLATION-ADJUSTED FUTURE VALUE: = 10,00,000/1.06 15 = 23965555.555555555557578727357360373643743664378797988799899999999999999999999999999999999999 In order to accumulate this at 12% nominal: Monthly SIP = 23,96,558/ (((1.01) 180 -1)/0.01) = 4,099/month. INDIAN Trends in inflation: Avg CPI inflation 2010-2024:, on average, 6%. Food inflation higher (~7%). Healthcare inflation ~9%. Education inflation ~10-12%. Always consider the right rate of inflation of your target. PURCHASING POWER CALCULATION: What will 1 lakh of the present value be in 20 years? Real value = 1,00,000 ÷ (1.06)^20 = ₹31,180 only! Requirement 3.2 more rupee to sustain comparable purchasing power. INVESTment Recommendations: Target real returns (after inflation, after taxes) of: Emergency fund: 0-1% (liquidity priority), Short-term goals (less than 5 years): 2-3%, Long-term goals (more than 5 years): 5-7% Retirement corpus: 6-8%. GearsKit retirement and goal planning calculators automatically include inflation to reflect the realistic corpus requirements and SIP amounts in the current rupee terms.

How is the difference between the flat rate interest and reducing balance interest calculation methods?

Two methods of interest calculation in loans FLat rate and Reducing balance have HUGE disparity in total interest paid: FLAT RATE METHOD: Interest on full original principal is paid in tenure of loan regardless of whether it is paid. The sum of interests = principal rate tenure. EMI = Principal + total interest/Tenure. Assume a loan of 5 lakh in 10 percent flat rate, 5 years. Total Interest = 5,00,000 × 0.10 × 5 = ₹2,50,000. Total Payment = ₹7,50,000. EMI = 7,50,000 ÷ 60 = ₹12,500. REDUCING BALANCE METHOD: Monthly expense of interest on balance. With repayment, principal decreases, hence, interest element decreases. EMI = (P × r × (1+r)^n) ÷ ((1+r)^n - 1). SAME EXAMPLE: 5L, 10 per cent compounding rate, 5 years. EMI = ₹10,624. Total Payment = ₹6,37,440. Total Interest = ₹1,37,440 only! Appalling disparity: Flat rate would pay 2,50,000 in interest compared with Reducing balance 137,440 - that is 82% more interest with flat rate! COMPARISON of effective rate: 10 percent flat rate is close to 18-19 percent reducing balance rate on true cost. IN INDIA: Flat rate: Particular personal loans, gold loans, micro-loans (usually deceiving). Reducing balance: All home mortgages, most auto mortgages, education mortgages, bank business mortgages. Finding a trap: Advertisement: 10 percent flat rate, EMI only: 12500 is cheap, but the real rate is about 18.6 percent! Never convert to reducing rate: Effective Kin 1-2 times Flat Kin. ALWAYS ASK LENDER: This flat rate or reducing balance? Obtain interest calculation technique in writing. Bank has to provide an effective interest rate (APR). To do personal loans comparisons of offers, reduce balance method applies when comparing apples to apples. GearsKit EMI calculator is based on reducing balance in line with bank calculations. Flat-to-Reducing rate converter is also available to expose the actual costs of the loans.

What is the real cost of a loan including processing costs and other expenses?

The cost of loans is not displayed in advertised interest rate. APR (Annual Percentage rate) + all charges: TOTAL COST COMPONENTS: (1) EMI principle + interest, (2) Processing fee (0.5-3% loan), (3) Documentation charges, (4) Legal/technical valuation fees, (5) Insurance (life, property), (6) Prepayment/foreclosure penalty, (7) Late payment charges, (8) GST on fees. APR CALCULATION: Effective rate with all initial costs. APR = (Total Interest + All Fees)/(Loan Amount- Upfront Fees)/Tenure/ 100. ELaborated example - Home Loan: The loan amount: 30,00,000. Interest rate: 9% p.a. for 20 years. EMI: ₹26,996 (using standard formula). Total EMI payments: ₹64,79,040. Interest: ₹34,79,040. Added cost: Processing fee (1%): 30000 + 18 percent GST = 35400. Legal/technical: ₹15,000. Property valuation: ₹5,000. Life insurance (0.5% per annum): 1,50,000 in 20 years. Total upfront: ₹55,400. Total additional: ₹2,05,400. ACTUAL TOTAL COST: EMI total: ₹64,79,040. Additional charges: ₹2,05,400. Grand total: ₹66,84,440. Actual money received: ₹30,00,000 - ₹55,400 = ₹29,44,600. True interest paid: ₹66,84,440 - ₹30,00,000 = ₹36,84,440. EFFECTIVE APR: ((36,84,440 ÷ 29,44,600) - 1) ÷ 20 × 100 = 9.36% (vs 9% advertised). EXAMPLE of comparison: Bank A: 9 percent rate, 1 percent processing fee, APR =9.35. Bank B: 9.25 rate, 0 processing fee, APR 9.25. Bank B more economical than higher rate! TIPS TO reduce the cost: (1) negotiate waiver of processing fee, (2) compare processing fee of 3 or more lenders on APR, not rate, (3) do not take loans with prepayment penalties, (4) check whether insurance is mandatory or optional, (5) consider tax cancelling (80C, 24B net cost), (6) tax cancelling (80C, 24B net cost). GearsKit loan comparison tool calculates true APR with all charges in assisting you to discover the most genuine cheapest loan offer in India.

What is SIP formula and what amount of money I should invest monthly to achieve 1 crore corpus?

SIP (Systematic Investment Plan) Future Value Formula: FV = P × (((1 + r)^n - 1) ÷ r) × (1 + r), where FV = Future Value (target corpus), P = Monthly investment, r = Expected monthly return (annual return/12), n = Number of months. TO CALCULATE MONTHLY SIP FOR TARGET: P = FV ÷ (((1 + r)^n - 1) ÷ r). REACHING ₹1 CRORE - SCENARIOS: SCENARIO 1 - Start young, 25 years, 12% return: n = 25 years = 300 months, r = 12%/12 = 1% = 0.01. P = 1,00,00,000 ÷ (((1.01)^300 - 1) / 0.01) = ₹2,844/month. Total invested = ₹8,53,200. Returns = ₹91,46,800 (10.7X your money!). SCENARIO 2 - Start age 30, 20 years, 12% return: P = 1,00,00,000 ÷ (((1.01)^240 - 1) / 0.01) = ₹10,086/month. Total invested = ₹24,20,640. Returns = ₹75,79,360 (4.1X). SCENARIO 3 - Start age 35, 15 years, 12% return: P = ₹19,893/month. Total invested = ₹35,80,740. Returns = ₹64,19,260 (2.8X). SCENARIO 4 - Aggressive, 10 years, 15% return: P = ₹32,567/month. Total invested = ₹39,08,040. Returns = ₹60,91,960. KEY INSIGHTS: (1) Starting 5 years early HALVES required monthly SIP! (2) Power of compounding: Scenario 1 invests least (₹8.5L) but gets most returns (₹91L). (3) Higher returns dramatically reduce SIP needed: At 8%: ₹15,601/month for 20 years. At 12%: ₹10,086/month. At 15%: ₹6,440/month. REALISTIC RETURNS INDIA: Equity MF long-term: 12-15%. Balanced MF: 10-12%. Debt MF: 7-8%. PPF: 7.1%. RECOMMENDATIONS BY AGE: Age 25: ₹5K/month can build ₹1.76 Cr by 50 at 12%. Age 30: ₹10K/month for ₹1 Cr by 50. Age 35: ₹20K/month for ₹1 Cr by 50. Age 40: ₹45K/month for ₹1 Cr by 60. Start early, invest consistently, stay invested long-term! GearsKit SIP calculator lets you play with different amounts, durations, and returns to plan your wealth journey accurately.

What is the method of calculating loan prepayment benefits and interests savings in India?

Loan repayment will save lakhs of interest! Determine actual savings: PREPAYment FORMULA: Interest Saved = (Outstanding Principal x Interest Rate x Remaining Tenure) -(Reduced Principal x Rate x New Tenure). EXAMPLE - Home Loan: Original: 20L, 9 per cent., 20 years (240 months). EMI: ₹17,997. Total interest: ₹23,19,280. After 5 years (60 EMIs): Paid so far: ₹10,79,820. Outstanding: ₹17,29,380. Remaining: 180 months. SCENARIO A - Lumpsum prepayment 3L, retain equivalent EMI: New outstanding 14,29,380. Original EMI ₹17,997 continues. New term: 141 months (11.75 years) as opposed to 15 years. Future interest in totality: 11,08,557 vs 17,65,174 without prepayment. Interest saved: ₹6,56,617! Prepayment ROI: 6,56,617/3,00,000 = 219-period. SCENARIO B - Prepayment 3L, cut EMI, maintain tenure: New EMI: 13,418 (cut down by 4,579). Save ₹4,579/month for 180 months. Total savings: ₹2,82,305 in interest. WHICH IS BETTER? Reduce tenure when: Desire to be out of debt sooner, Job security high, No cash flow pressure. Minimize EMI when: Monthly budget constrained, Desires flexibility, Planning of other investments. TAX CONSiderations: Prepayment will decrease 80C benefit (Rs.1.5L principal deduction). Prepayment decreases 24B benefit ( 2L 2 interest deduction). Optimal: Prepay when 80C limit by other sources is reached. PREPAYMENT PENALTY: RBI requires: NO floating rate home loans prepaid out of own funds. Fixed rate loans: Banks have the ability to impose 2-4% penalty. Personal loans: A penalty of 2-5common. Calculate: If penalty 3% on ₹3L = ₹9,000. Net savings = 6,56,617-9,000= 6,47,617 still worth having! WHEN to prepay: Year 1-5: Maximum interest savings (interest component highest). Windfall: Bonus, inheritance, matured FD. Low ROI environment: Prepay investments with low returns than loan rate. GearsKit prepayment calculator displays precise savings, tenure cut and ideal strategy of prepayment of your loan.

Financial Math Made Simple EMI, NPV, IRR, and Important Formulas

Expert Insight: By learning these 20 important formulas, you may become a better financial decision-maker and you might save tens of thousands of lakhs of interest payments in your lifetime.

The financial formula behind sound money management is financial formula. Learning these mathematical equations will help you make sound choices be it in dealing with debt, evaluating investments, or doing retirement planning.

Time Value of Money Formulas

The basic concept is that due to the possibility of future growth, the present money is valuable as compared to the equivalent present or future money.

Future Value of Lump Sum

Essential

FV = PV × (1 + r)ⁿ

FV Future Value

PV Present Value

r Interest rate per period

n Number of periods

Example Calculation

Present Value: ₹1,00,000

Annual Rate: 8%

Time: 10 years

Future Value: ₹2,15,892

Future Value of Annuity

Advanced

FV = PMT × [(1 + r)ⁿ - 1] ÷ r

FV Future Value

PMT Periodic payment

r Interest rate per period

n Number of payments

Loan Calculation Formulas

Critical equations of interpretation and control of various kinds of loans.

EMI Calculation

Home Loan Example

Loan Amount: ₹50,00,000

Interest Rate: 8.5% p.a.

Tenure: 20 years

Monthly EMI: ₹43,391

Effective Interest Rate

Important

EIR = (1 + i/n)ⁿ - 1

Calculates the actual annual interest rate when the compounding is done more than once in a year.

EIR Effective Interest Rate

i Nominal interest rate

n Periods of compounding annually

Investment Return Formulas

These significant metrics allow evaluating and comparing investment performance.

Return on Investment (ROI)

ROI = (Gain - Cost) ÷ Cost × 100%

Determines the profitability of the investment in a percentage.

Compound Annual Growth rate (CAGR).

CAGR = (EV/BV)^(1/n) - 1

A continuous growth rate of the investment is defined as smooth.

Dividend Yield

Yield = Annual Dividend ÷ Stock Price

Shows the dividend yield in percent form of the stock price.

Net Present Value (NPV)

Business

NPV = ∑ [Ct ÷ (1 + r)ᵗ] - C₀

Applied to determine the profitability of a project or investment. The net present value (NPV) is positive which indicates that the investment is profitable.

Ct Cash flow at time t

r Discount rate

C₀ Initial investment

Savings & Compounding Formulas

Compound Interest

Wealth Building Example

Monthly SIP: ₹10,000

Expected Return: 12% p.a.

Duration: 25 years

Final Corpus: ₹1.87 Crores

Rule of 72

Years to double = 72 ÷ Interest Rate

It is a quick way of determining how many years an investment will require to be doubled at a given annual rate.

Rule of 114

Division of years by Interest rate = 114/ Interest rate.

Determines the amount of time that money would take to triple considering a compound interest rate.

Rule of 144

The number of years to quadruple = 144/Interest Rate.

Divide the time it will take your money to increase in value four times.

Formulas of Retirement Planning

Retirement Corpus Calculation

Planning

Corpus = Annual Expense × (1 - (1 + i)⁻ⁿ) ÷ (r - i)

Calculates the size of retirement corpus required with taking into consideration expected returns and inflation.

LC Current annual living cost

i Expected inflation rate

r Expected return rate

n Retirement years

Risk Metrics Formulas

These are the key formulas to measure and manage financial risk.

Standard Deviation (σ)

Risk

σ = √[Σ(xᵢ - μ)² ÷ N]

Quantifies the spread of returns around the mean, which shows volatility of investments.

xᵢ Individual return

μ Mean return

N Number of periods

Sharpe Ratio

Sharpe = (Rₚ - Rბ) ÷ σₚ

Measure of risk-adjusted returns of excess return versus volatility.

Beta (β)

β = Cov(Rₐ, Rₘ) ÷ Var(Rₘ)

Measures systematic risk against the market in general.

Value at Risk (VaR)

VaR = μ - z × σ

Loss that can be experienced over a given time at a given confidence level.

Business Finance Formulas

Critical business valuation, cash flow and health formulas.

Return on Equity (ROE)

Business

ROE = Net Income ÷ Shareholder's Equity

Measures the effectiveness of the management to utilize shareholders equity to reap profits.

Current Ratio

Current Ratio = Current Assets/Current Liabilities.

Assesses the short-term liquidity and debts payment capacity.

Debt-to-Equity Ratio

D/E = Liabilities 100/Shareholder Equity

Represents the risk and the financial leverage of a business firm.

Gross Profit Margin

GPM = (Revenue - COGS) ÷ Revenue × 100%

Expresses ratio of revenue that is left after subtraction of cost of goods sold.

Real Estate Formulas

Important property investment and valuation calculations.

Capitalization Rate

Real Estate

Cap Rate = Net Operating Income ÷ Property Value

Is a calculation that is used to determine the possible payback of a real estate investment.

NOI Rental revenue less expenditure per year.

Loan-to-Value (LTV)

LTV = Loan Amount ÷ Property Value

Ratio of the mortgage value and the property value as appraised.

Cash-on-Cash Return

CoC = Cash flow (after taxes) annually/Cash invested.

Measures convert the real cash investment in property.

Price-to-Rent Ratio

P/R = Median Home Price /Median Annual Rent.

Helps decide whether one is better off renting or buying a house in a market.

Tax Calculation Formulas

Critical equations in calculating taxes and knowledge of taxation.

Effective Tax Rate

Tax

Effective Rate = Total Tax ÷ Taxable Income

The true tax payment percentage with consideration of progressive tax brackets.

Taxable Income

Taxable Income = Gross Income - Deductions - Exemptions

Taxable income is determined as income after making all relevant adjustments.

Capital Gains Tax

CGT = (Selling Price - Purchase Price - Expenses) × Tax Rate

Tax on profit made on sales of property or stocks which constitute capital assets.

After-Tax Return

After-Tax Return = Pre-Tax Return × (1 - Tax Rate)

Real investment return after payment of taxes.

Frequently Asked Questions

What is the most significant formula of personal finance?

The most important one is, perhaps, the compound interest formula explaining why it is worth saving early and investing long-term. To manage loans, one should also understand how the EMIs are calculated.

What is the accuracy of the "Rule of" formulas?

In the range of interest rates 6% to 10% the Rules of 72, 114 and 144 give quick and fairly accurate approximations. The precise formula of compound interest should always be applied to get the right calculations.

When should I use NPV vs IRR?

Net present value (NPV) is used to determine the absolute value that an investment will yield. The Internal rate of Return or IRR should be used to compare different investments and to understand their percentage returns. The NPV is usually favored in mutually exclusive projects.

What should I do in calculating inflation?

Apply the real rate of return formula:(1 + nominal rate)/(1 + inflation rate)-1. Having considered the inflation, this demonstrates to you the true growth in the purchasing power of your investments.

Essential Financial Formulas 2026

Critical Financial Formulae 2026 Learn with confidence