The calculation of the revaluation of severance pay is the annual mechanism that adjusts the value of severance pay to inflation, protecting its purchasing power over time. The system is based on a precise formula: a fixed rateof 1.5% and a variable component linked to consumer price trends.
Understanding how it works is crucial, both for you as an employee and for you as someone who manages a company's finances. This guide will take you step by step through the process, from regulatory aspects to practical examples, to transform theory into concrete, error-free figures.
Many people imagine severance pay (TFR) as a simple piggy bank that fills up month after month. In reality, its value is dynamic. Every year, the amount you have accumulated up to December 31 of the previous year is "revalued," meaning it grows to protect against the increase in the cost of living.
This process is not left to chance, but follows a formula established by law. Understanding how it works is essential for everyone.
The revaluation of severance pay is based on a hybrid mechanism designed to balance growth and stability. The reference standard is Article 2120 of the Civil Code, which establishes a rate composed of two key elements. If you would like to learn more about the regulations, Assolombarda's guidelines on calculating severance pay revaluation are an excellent starting point.
The formula applied is: Fixed Rate (1.5%) + Variable Rate (75% of the increase in the FOI index).
In simple terms, revaluation guarantees you a minimum return of 1.5% per year, plus a significant portion of the inflation recorded by ISTAT. This ensures that the value of your severance pay not only grows steadily, but also adapts to the real economic context.
A final step, often overlooked but crucial: the company must pay a 17% substitute tax on the capital gain generated by this revaluation . This amount is withheld before the net increase is added to the employee's severance pay fund . Skipping this step can lead to incorrect calculations and tax problems, making the correct management of severance pay a key activity for the compliance of every company.
Let's get to the heart of calculating severance pay revaluation to understand how to transform theory into numbers. The first rule to keep in mind is fundamental: the basis for calculation is not the total accumulated severance pay, but only the fund set aside up to December 31 of the previous year.
The portion of severance pay accrued during the current year does not, in fact, contribute to the revaluation for that year. This is a crucial detail, often a source of errors that can alter the final result.
To calculate the annual revaluation coefficient, you must add two distinct elements:
The first step, therefore, is to retrieve the official ISTAT index, a public figure that can be easily found on the National Institute of Statistics website. Once obtained, apply the percentage of 75% to find the inflation-related component.
This diagram visually summarizes the calculation process, from the initial severance pay to the revalued amount.
As you can see from the diagram, it is a linear sequence that increases the value of the initial severance pay fund through the revaluation mechanism.
By adding the fixed portion (1.5%) and the variable portion (75% of the ISTAT index), you finally obtain the annual revaluation coefficient. At this point, you're almost done: simply multiply this coefficient by the severance pay fund set aside on December 31 of the previous year.
Let's look at a practical example to make everything clearer.
Let's consider a common scenario: an employee with accumulated severance pay and a hypothetical revaluation coefficient.
StepDescriptionExample value (€)Initial severance pay fundAmountset aside as of 12/31/2023.20,000.00Revaluation coefficientFixed rate(1.5%) + Variable rate (let's assume 1.0%) = 2.5%.2.50% Gross revaluation €20,000.00 * 2.5% €500.00 Substitute tax (17%)€500.00 *17% €85.00 Net revaluation€500.00 - €85.00€415.00
As can be seen from the table, the process is a sequence of straightforward mathematical operations, from the gross amount to the net amount that will actually be credited.
The final step is the tax aspect. The employer must calculate and pay a substitute tax on the gross revaluation amount. Since 2015, the rate of this tax has been set at 17%. For more information on regulatory aspects and tax deadlines, you can explore the detailed guidelines on the Assolombarda website.
Returning to the figures in our example:
The amount of €415 is the net revaluation that will be added to the employee's severance pay fund, bringing it to a new total of €20,415. This figure will then be added to the severance pay accrued during the year.
When an employee leaves the company in the middle of the year, the calculation of the severance pay revaluation follows specific rules. The year-end coefficient is not waited for, but monthly indices are used to ensure that the revaluation is perfectly proportionate to the period worked.
The basis for calculation remains unchanged: it is always based on the severance pay fund set aside on December 31 of the previous year. The only change is the multiplier, i.e., the monthly coefficient published by ISTAT.
To understand which monthly coefficient to apply, there is a very precise conventional rule, which revolves around the exact date of termination of the relationship.
This distinction is crucial for the accuracy of the calculation. An error here can create problems for both the company and the employee. The formula combines the fixed rateof 1.5% per annum (reproportioned on a monthly basis) with 75% of the increase in the consumer price index (FOI). For further information, historical analyses of ISTAT coefficients for severance pay provide a complete picture of the evolution of these indices.
Let's put this into practice with a concrete scenario. Imagine that an employee terminates their employment on July 20. As of December 31 of the previous year, their severance pay fund was €25,000.
In this scenario, €43.23 is the net amount that will be added to the employee's severance pay fund at the time of final settlement.
Accurate management of these calculations is vital for finance and HR teams, especially in SMEs where every detail counts. Keeping accurate records can greatly simplify these procedures and reduce the risk of errors.
Calculating severance pay revaluation becomes more complex when situations such as advance payment requests come into play. Managing these exceptions accurately is essential to comply with regulations and ensure that employees receive what they are entitled to.
Advance payments are the most common case. If an employee requests and obtains part of their severance pay before the end of their employment, that amount does not simply disappear from the calculation, but must be correctly deducted from the calculation basis for future revaluations.
When an advance payment is made, the severance pay fund that you had set aside as of December 31 of the previous year is reduced. As a result, the revaluation for subsequent years can no longer be based on the original amount, but on the amount remaining after subtracting the advance payment.
Ignoring this step is a common mistake: it would lead to an inflated revaluation, with incorrect calculations of the substitute tax and an incorrect final severance pay. For SMEs, a practical tip is to track these events in a dedicated spreadsheet.
This screenshot, for example, shows a basic template in Google Sheets for keeping track of an employee's severance pay, with a dedicated column for tracking any advances.
As you can see, a clear structure allows you to always keep an eye on the correct tax base for revaluation.
Another point that often causes confusion is the difference between accrued severance pay and accrued severance pay.
Keeping these two values separate is the key to avoiding mistakes. Confusing them means applying the revaluation coefficient to an incorrect tax base.
If there are retroactive salary changes or other adjustments, these events require a correction to the severance pay already set aside. If a salary increase is retroactive, the severance pay amounts for past months must also be recalculated and added to the fund.
This, in turn, will change the basis for calculation for subsequent revaluation. Careful management of these adjustments is crucial for accuracy. Optimize your business management processes is an important step in minimizing the risk of errors.
Here are some practical tips for SME finance teams:
To truly understand the mechanism behind the revaluation of severance pay, it is useful to take a historical perspective, which shows how this tool has protected workers' savings by adapting to different economic scenarios.
Inflation is the driving force behind the variable component of the revaluation. When the cost of living rises, the coefficient is adjusted to compensate for the loss of purchasing power of the severance pay. In periods of economic calm, however, the return settles closer to the fixed rateof 1.5%, which acts as a safety net.
This direct correlation helps to put today's data into context, demonstrating how severance pay was designed to be a pillar of financial stability.
The history of revaluation coefficients is one of ups and downs, closely linked to inflation. Consider December 2004, when there was a peak of 2.793103%, followed by a collapse to 0.125% in January 2005. An almost identical pattern was repeated between 2014 and 2015.
These fluctuations reflect the current economic climate. If you are interested, you can learn more about this topic by consulting the evolution of ISTAT indices for severance pay to observe fluctuations over time.
To make the idea even clearer, we have compared some key periods in the following table.
This table does not just show numbers, it tells a story: that of a mechanism that adapts to the country's economic dynamics.
Understanding these historical trends is key to interpreting current data and allows you to clearly explain to employees why their severance pay varies so much from year to year, strengthening their confidence in the system.
Analyzing these trends is a typical business intelligence activity. Using business intelligence software allows you to automate the analysis of complex time series, transforming raw data into graphs and dashboards that provide a clear and immediate overview.
At the end of the process, it is normal to still have some doubts. Here are the answers to the most common questions about calculating severance pay revaluation.
Nothing. The revaluation does not apply to him. The mechanism only applies to the severance pay fund existing on December 31 of the previous year. An employee hired during 2024, for example, will only see his first revaluation at the end of 2025, calculated on the severance pay set aside on December 31, 2024.
Exactly the same as for full-time employees. The calculation is identical. The revaluation simply applies to the severance pay that has actually been set aside by the employee, regardless of their working hours.
The primary and most reliable source is the official ISTAT website, where they are published regularly. Alternatively, you can find them on authoritative industry sources, such as portals specializing in tax matters.
A key point to remember: The 17% substitute tax is calculated exclusively on the amount of the revaluation. It does not affect the portion of severance pay accrued during the year, which is totally exempt from this specific tax.
This distinction is essential in order to avoid mistakes and ensure full tax compliance.
Turn your raw data into strategic decisions. Electe helps you visualize, analyze, and predict business performance with a single click. Start your free trial →
.svg)
.svg)
.svg)
