In-depth
How the Severance Pay (TFR) Calculation Works
TFR (Trattamento di Fine Rapporto), commonly known as "severance pay", is a sum that the employer sets aside each year and pays to the employee at the end of the employment relationship.
The TFR Formula
TFR is calculated in two steps:
1. Annual Accrual
Each year, the gross annual salary divided by 13.5 is set aside:
Annual quota = Gross Annual Salary / 13.5
From the annual quota, 0.50% of the gross annual salary is subtracted as a contribution to the INPS Guarantee Fund.
2. Annual Revaluation
The accumulated TFR is revalued each year using this formula:
Revaluation = 1.5% fixed rate + 75% of the ISTAT consumer price index
The revaluation is subject to a substitute tax of 17%.
Practical Example
An employee with a gross annual salary of 30,000 EUR for 10 years:
- Gross annual quota: 30,000 / 13.5 = 2,222.22 EUR
- INPS contribution: 30,000 x 0.50% = 150.00 EUR
- Net annual quota: 2,072.22 EUR
- Gross TFR after 10 years (with revaluations): approximately 23,500 EUR
- Net TFR (after separate taxation): approximately 20,000-21,000 EUR
TFR Taxation
TFR is subject to separate taxation and is not added to the annual income:
- The reference income is calculated: TFR / years of service x 12
- The corresponding IRPEF rate is applied to that income
- The tax is: rate x taxable TFR amount
This taxation method is generally more favorable than the standard IRPEF income tax.
TFR in the Company vs. Pension Fund
| Aspect | TFR in the Company | Pension Fund |
|---|---|---|
| Return | 1.5% + 75% ISTAT index | Variable (potentially higher) |
| Taxation | Average IRPEF rate | From 15% to 9% (after 15 years) |
| Tax Deductibility | No | Up to 5,164.57 EUR/year |
| Liquidity | Only at end of employment | Advances after 8 years |
| Risk | Tied to the company | Diversified |
When Is It Paid
- Private sector: within 30-45 days from the end of the employment relationship
- Public sector: 12 to 24 months from the end of employment
- You can request an advance of up to 70% after 8 years of service for purchasing a first home, medical expenses, or parental leave
