By custom, and by the usual legal position unless you agreed otherwise, a part payment first clears the interest due, and only the rest reduces the principal. So to calculate interest after a part payment, work out the interest up to the payment date, take the payment off it, and run interest on the new principal from then on.
On this page8
Interest first: the usual rule
When a borrower returns part of the money, the lender first works out the interest due up to that day. The payment goes to that interest. Only what is left over reduces the principal (mool).
- Payment less than the interest due: all of it goes to interest. The principal stays the same, and the rest of the interest stays due.
- Payment more than the interest due: the interest is cleared, and the balance comes off the principal. From that day, interest runs on the smaller principal.
This is how a bahi khata normally treats part payments, and it is the order to assume unless something else was agreed.
Why interest comes first
- Interest falls due first. It builds up month by month on money the borrower has already had the use of. The principal is due at the end.
- Unpaid interest earns nothing. Under simple interest, old interest does not grow. If payments went to principal first, the lender's interest would sit unpaid, earning nothing, while the principal and future interest shrank.
- Banks do the same. Every EMI first pays the month's interest, and only the rest reduces the loan. EMI vs simple interest shows the split month by month.
Worked example: two part payments
₹1,00,000 given on 1 Jan 2026 at ₹2 sekda (24% a year, simple). Interest on the full amount is ₹2,000 a month. The borrower pays ₹1,500 on 15 Feb and ₹20,000 on 1 May.
15 Feb: ₹1,500 paid
- Interest from 1 Jan to 15 Feb (1 month 14 days) on ₹1,00,000: ₹2,933.33.
- The payment is less than that, so all ₹1,500 goes to interest.
- Interest still unpaid: ₹1,433.33. Principal unchanged at ₹1,00,000.
1 May: ₹20,000 paid
- New interest from 15 Feb to 1 May (2 months 16 days) on ₹1,00,000: ₹5,066.67.
- Total interest due: ₹1,433.33 + ₹5,066.67 = ₹6,500.
- The payment clears it: ₹6,500 to interest, ₹13,500 to principal.
- Principal left: ₹1,00,000 − ₹13,500 = ₹86,500. From now on interest is ₹1,730 a month.
| Date | Paid | Interest due | To interest | To principal | Interest left | Principal left |
|---|---|---|---|---|---|---|
| 15 Feb | ₹1,500 | ₹2,933.33 | ₹1,500 | ₹0 | ₹1,433.33 | ₹1,00,000 |
| 1 May | ₹20,000 | ₹6,500 | ₹6,500 | ₹13,500 | ₹0 | ₹86,500 |
The same loan, principal first
Now suppose the two sides had agreed that payments reduce the principal first. On 15 Feb, the ₹1,500 cuts the principal to ₹98,500 and the ₹2,933.33 of interest stays unpaid. On 1 May, new interest on ₹98,500 is ₹4,990.67, so unpaid interest reaches ₹7,924, and the whole ₹20,000 cuts the principal to ₹78,500.
| Interest first | Principal first | |
|---|---|---|
| Principal after 1 May | ₹86,500 | ₹78,500 |
| Unpaid interest after 1 May | ₹0 | ₹7,924 |
| Total owed on 1 May | ₹86,500 | ₹86,424 |
| Interest each month after that | ₹1,730 | ₹1,570 |
| Total owed on 1 Aug 2026 | ₹91,690 | ₹91,134 |
Principal first is better for the borrower: ₹76 less on 1 May, ₹160 less interest every month after that, and ₹556 less by 1 Aug. The gap keeps growing. Meanwhile ₹7,924 of old interest sits unpaid until the principal is cleared, earning the lender nothing. That is why principal first needs a clear agreement between the two sides.
Why your bank says a prepayment goes to principal
Search for part payments and most pages say a prepayment "goes towards the principal". For a bank EMI loan that is true, and it fits the interest-first rule. Each EMI already pays that month’s interest, so on the day you prepay there is usually no interest due, and the whole extra amount cuts the principal. If an EMI is overdue, the money normally clears that first.
A loan at sekda usually has no EMIs. Interest builds up between payments, so a part payment meets that interest first. Both statements are the same rule, applied to different loans. See the EMI calculator for the month-by-month split of an EMI loan.
Unpaid interest does not earn interest
Under simple interest, interest is charged only on the principal. In the example, ₹1,433.33 of interest was left unpaid on 15 Feb. The interest from 15 Feb to 1 May was still worked out on ₹1,00,000, not on ₹1,01,433.33.
Interest earns interest only if the loan is on compound terms (chakravriddhi byaj), where unpaid interest is added to the principal at agreed dates. See simple vs compound interest. There may also be a limit on how much interest can be recovered at one time: see the damdupat rule.
What the law says, in brief
Part payment receipt: what to write
- Write the date and the amount received, and how it was paid (cash, UPI, cheque).
- Write the interest due up to that date, and how the payment was split: so much towards interest, so much towards principal.
- Write the principal and any interest still due after the payment.
- The person paying signs it, or writes it in their own hand; the person receiving signs too. Keep a copy each. A photo or message sent the same day is a useful extra record.
Why the payer’s signature matters: under section 19 of the Limitation Act, 1963, a payment made before the time limit runs out starts a fresh limitation period only if it is acknowledged in the handwriting of, or in a writing signed by, the person making the payment. A receipt signed only by the lender does not do that.
Try it in the calculatorWork out your own loan: every payment split into interest and principal, ready to print7 short answersPart payment on a loan: your questions answered
Open ▾Close ▴
Does a part payment reduce the principal?
Only by what is left after the interest due is cleared. In the example, ₹20,000 was paid when ₹6,500 of interest was due, so ₹13,500 came off the principal and it fell to ₹86,500. A payment smaller than the interest due doesn’t reduce the principal at all.
How do I calculate interest after a part payment?
Work out the interest up to the payment date, take the payment off that interest first, and cut the principal by whatever is left. From that date, interest runs on the new principal. In the example, ₹86,500 at ₹2 sekda is ₹1,730 a month from 1 May. The part payment calculator does each step with exact dates.
Is interest first the law in India?
Generally yes. In Meghraj v. Bayabai (1969) the Supreme Court restated the normal rule: on a debt carrying interest, a payment goes first to interest and then to principal, unless the parties agreed otherwise. Sections 59 to 61 of the Indian Contract Act answer a different question: which of several debts a payment settles. This is general information, not legal advice.
Can the borrower say the payment is for principal only?
Only if the lender agrees. The Supreme Court has held that the borrower’s own condition is not enough: unless the lender accepted the money on that condition, it goes to interest first. If you want principal first, write it into the loan terms or the receipt, and have both sides sign.
On a bank EMI loan, does a part payment go to principal?
Usually yes. Each EMI already pays that month’s interest, so an extra payment on top of the EMI goes to the outstanding principal; if an EMI is overdue, the money normally clears that first. A smaller principal means less interest from then on. Ask the lender whether it will cut your EMI or your tenure, and see the split in the EMI calculator.
Can a bank charge a fee for part payment of a loan?
Not on a floating-rate loan taken by an individual for a non-business purpose, such as a floating-rate home loan: RBI rules bar banks and NBFCs from charging any prepayment fee on it, for part or full payment. On loans sanctioned from 1 January 2026, any fee on other loans must be disclosed upfront, and on a term loan it can be charged only on the amount prepaid.
Does a part payment extend the time limit to recover a loan?
It can. For money lent, the time limit to sue is usually three years from the date of the loan. Under section 19 of the Limitation Act, 1963, a payment made before that limit runs out starts a fresh three years from the payment date, but only if it is acknowledged in the payer’s own handwriting or in a writing they sign. So have the borrower sign the entry.