How to calculate TFR (Severance Pay): accrual, revaluation and taxation

The steps

1. 1.

   1. Identifying the calculation base

   The first step is identifying the eligible remuneration for the TFR calculation. Unless collective bargaining agreements (CCNL) provide otherwise, art. 2120 of the Italian Civil Code states that the calculation base includes all sums paid in connection with the employment relationship on a non-occasional basis, excluding expense reimbursements. It is necessary to carefully check the applicable CCNL, as it often derogates from the all-inclusiveness principle by excluding specific pay items, such as flat-rate overtime or certain performance bonuses. For fractions of a year, periods of 15 days or more are counted as a full month.

2. 2.

   2. Calculating the annual accrual quota

   Once the eligible annual remuneration is determined, it must be divided by the fixed divisor of 13.5. The result represents the principal quota accrued by the employee for the reference year. For example, if the eligible annual remuneration is 27,000 euros, the TFR quota for the year will be 2,000 euros (27,000 divided by 13.5). From this gross amount, the employer must deduct a contribution equal to 0.50% of the remuneration subject to social security contributions, allocated to the INPS Pension Adjustment Fund. The resulting net quota is set aside in the employee's TFR fund.

3. 3.

   3. Determining the revaluation coefficient

   The TFR fund accrued up to December 31st of the previous year must be revalued annually. The revaluation rate consists of a fixed portion of 1.5% and a variable portion equal to 75% of the increase in the ISTAT consumer price index for blue- and white-collar households (FOI) compared to December of the previous year. Professionals do not need to calculate the index independently: updated monthly coefficients are officially published on the ISTAT portal. If the employment terminates during the year, the ISTAT index of the termination month is used.

4. 4.

   4. Applying revaluation and substitute tax

   Suppose a pre-existing TFR fund of 10,000 euros and an announced annual ISTAT revaluation coefficient of 3.5%. The gross revaluation will be 350 euros. A 17% substitute tax is applied to this amount, and only to the revaluation. The tax to be paid to the Revenue Agency will therefore be 59.50 euros (17% of 350). The net revaluation to be added to the TFR fund will be 290.50 euros (350 minus 59.50). The new TFR fund will be the sum of the previous fund, the net revaluation, and the new accrued annual quota.

5. 5.

   5. Separate taxation on the final capital

   Upon final disbursement, the accumulated capital, excluding already taxed revaluations, is subject to separate taxation. The calculation requires determining the reference income: the accrued TFR is multiplied by 12 and divided by the number of years and fractions of years of service. The tax is calculated on this reference income by applying the current IRPEF brackets, thus obtaining the average rate. This average rate is then applied to the TFR amount to be disbursed to obtain the net tax due. The Revenue Agency will subsequently recalculate the tax.

Legal basis: Art. 2120 c.c. (Disciplina del trattamento di fine rapporto)Art. 19, D.P.R. 22 dicembre 1986, n. 917 (TUIR - Tassazione separata del TFR)Art. 11, D.Lgs. 18 febbraio 2000, n. 47 (Imposta sostitutiva sulle rivalutazioni)L. 29 maggio 1982, n. 297 (Riforma della disciplina del TFR)