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CS Professional · Banking and Insurance - Laws and Practice · Calculation of Interest and Annuities

Kavita Textiles takes a term loan of ₹12,00,000 at 12% p.a., interest charged monthly on the reducing balance. The first EMI of ₹26,000 is paid at the end of month 1. What is the outstanding principal immediately after this first EMI?

The outstanding principal is ₹11,86,000. Month 1 interest is ₹12,000 at 1% per month, so only ₹14,000 of the ₹26,000 EMI reduces principal. Deducting the full EMI from the loan would ignore the interest component and give a wrong balance.

  1. A₹11,86,000Correct
  2. B₹11,74,000
  3. C₹12,12,000
  4. D₹11,88,000

Explanation

Monthly rate is 12%/12 = 1%. Interest for month 1 = 12,00,000 × 1% = ₹12,000. Principal repaid = 26,000 − 12,000 = ₹14,000. Outstanding = 12,00,000 − 14,000 = ₹11,86,000. Subtracting the whole EMI (₹11,74,000) wrongly treats the interest as principal repayment.

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