40% EMI Rule:

The 40% EMI rule is a personal finance principle which says that your overall Equated Monthly Installments (EMIs) on all your loans (home, car, personal, etc.) cannot be more than 40% of your net monthly salary. This rule allows you to control debt, prevent overleveraging, stay financially healthy, and ensure that you have sufficient funds remaining for regular expenses, savings, and emergencies.

How it works:
Compute your net monthly earnings: This is your salary after deductions for taxes.
Compute 40% of that income: This is the highest combined EMI you should ideally pay every month.

Add up your existing EMIs: Total up all your existing loan payments, including your home loan, car loan, and any other recurring debt obligations.

Compare: If your overall EMIs are less than 40% of your income, you’re good to go. If they exceed it, you could be prone to a debt trap and should consider increasing your income or decreasing your debt.

Why it’s significant:
Financial Well-being:
It makes sure you have sufficient money to cater to your other financial requirements, like day-to-day expenses, retirement savings, investments, and creating an emergency fund.
Following this rule keeps you from accumulating too much debt, which results in financial tension or loan defaults.

Loan Eligibility:
This is usually employed by lenders as a tool to measure loan eligibility since it reflects your capacity for handling debt and minimizes the risk of default.