What is the Principal Amount in a Home Loan?

The principal amount in a Home Loan is the amount you borrow from the lender, excluding the interest and other charges associated with the loan. Your EMI comprises both principal repayment and interest. As you repay the loan, the outstanding principal gradually reduces, and interest is calculated on the outstanding loan balance as per the applicable interest rate and repayment terms.

A Home Loan EMI consists of two components: principal and interest. During the initial years of the tenure, a larger portion of the EMI generally goes towards interest, while a smaller portion reduces the principal. As the loan progresses, the outstanding principal reduces, lowering the interest charged on the remaining balance.

Buying a house is an exciting prospect, especially when it is an aspirational venture for most first-time homebuyers. While a Home Loan is the ideal funding solution for such purchases, it is important that you seek a Home Loan amount that can do both – accommodate the property you want to buy and fit into your repayment capacity.

Even if you downscale your Home Loan principal amount, the total repayment amount still adds up to be a substantial amount that will take you a considerable period to repay. Keeping the size of the commitment in mind, you should aim to keep your Home Loan repayment manageable, which can be done if the principal amount can be paid off comfortably without stretching your finances too thin.

Here are some aspects you should look at closely, before you decide your Home Loan amount:

• Existing Financial Commitments: Make sure that you account for your ongoing financial obligations when you plan your Home Loan. If your current payment responsibilities are already high, consider scaling down your Home Loan amount to suit your repayment capacity.
• Loan-to-Value Ratio: Another significant factor to consider is the loan-to-value ratio. It helps lenders calculate the final Home Loan amount they are permitted to sanction based on the RBI’s mandate. The current Home Loan LTV ratio stands at 75% to 90% of the property value, that is, lenders can fund only up to 90% of the cost and not more. 

Use this information to reassess the loan amount you stand to get from the lender and plan your down payment accordingly. This way, you request an amount that matches your eligibility and save on your potential interest outflow. 

​​​​Calculating the principal amount in a Home Loan is simpler than you might think. There's an easy formula you can use:​​​

​​​​Principal Amount (P) = (Interest Amount (I) * 100) / (Number of Years (N) * Interest Rate (R))​​​

​​​​Let’s understand this formula with an example. ​​​

​​Let us assume you took a Home Loan of Rs.7 Lakh at the rate of 8.50% p.a. for 10 years. Here, the simple interest amount is Rs.5,95,000​. ​To calculate the principal amount, let us use the formula as stated above. ​​

​​P = (5,95,000 * 100) / (10 * 8.50)​​

​​P = Rs.7,00,000​​​​

The outstanding principal is the portion of your Home Loan amount that remains to be repaid, excluding future interest. You can check it through the following:

• Amortisation schedule: The repayment schedule shows how each EMI is divided between principal and interest and how the outstanding principal reduces over the loan tenure.
• Home Loan Statement:Your Home Loan statement. provides details of your repayment history, including the original loan amount, repayments made, and the outstanding principal balance.

You can also use the Home Loan EMI Calculator to understand how the principal and interest components may change over a chosen repayment tenure. Enter the loan amount, interest rate, and tenure to estimate the EMI and overall repayment amount.

You can reduce the outstanding principal of your Home Loan by repaying more than the amount scheduled through regular EMIs. Common ways include:

• Make part-prepayments: Paying a lump sum towards the loan directly reduces the outstanding principal and can lower the interest payable over the remaining tenure
• Increase your EMI: If your repayment capacity improves, a higher EMI can increase the amount going towards principal and help repay the loan sooner
• Use additional income for prepayment: Bonuses, incentives, or other surplus funds can be used to make occasional principal prepayments instead of waiting until the end of the loan tenure

Under the old tax regime, eligible Home Loan principal repayments can be claimed as a deduction under Section 123 of the Income Tax Act, 2025, within the overall limit of Rs.1.5 Lakh per tax year for specified payments covered by the section. The deduction is not available under the new tax regime under Section 202.

For Home Loan principal repayment to qualify:

• The payment must relate to the purchase or construction of a residential house property.
• Stamp duty and registration fees paid for transferring the residential property can also qualify within the same overall Section 123 limit.
• If the property is transferred before five years from the end of the tax year in which possession was obtained, the deductions previously claimed for the qualifying property payments can become taxable in the year of transfer.