# Gratuity vs TFR: How End-of-Service Pay Works in India and Italy

> Indian gratuity (15/26 formula, 5-year rule) vs Italian TFR (annual pay ÷ 13.5, paid on every exit). Calculation, funding and budgeting compared.

Every Indian HR and finance team knows gratuity: the lump sum paid on exit after five years of service. Italy has an equivalent with a very different design: **TFR** (trattamento di fine rapporto). The short version is that TFR is earned from day one, accrues every month and is paid on **every** exit, including resignation. Budget for it as part of salary, not as a contingent liability. Full comparison on [Italy vs India](/italy-vs-india.html).

## India: gratuity under the Code on Social Security

Gratuity was governed by the Payment of Gratuity Act, 1972, now subsumed into the **Code on Social Security, 2020**, in force from 21 November 2025.

Key rules:

- **Eligibility:** five years of continuous service for permanent employees (waived on death or disablement). **Fixed-term employees** qualify pro rata after **one year**, a change introduced by the code.
- **Formula:** 15 days' wages for each completed year of service, calculated as last drawn wages × 15 ÷ 26 × years of service (the 26 reflecting working days in a month).
- **Wages:** basic plus dearness allowance; under the codes, the uniform definition of wages adds back excluded allowances exceeding 50% of total remuneration, which can increase gratuity for CTC structures with low basic pay.
- **Ceiling:** a maximum amount set by the government, ₹20 lakh under the latest notification under the old Act. <!-- review: confirm current ceiling under the Code on Social Security rules -->
- **Funding:** many employers fund through an insurer's group gratuity scheme, but the liability is the employer's.

Example: last drawn wages of ₹1,00,000 a month after 7 years gives ₹1,00,000 × 15 ÷ 26 × 7 ≈ ₹4,03,846.

## Italy: TFR under art. 2120 of the civil code

TFR works differently:

- **Eligibility:** every employee, permanent or fixed-term, from the first day. No qualifying period.
- **Accrual:** each year, the employer sets aside an amount equal to the **annual pay divided by 13.5**, which is about **7.41%** of pay. "Pay" means all amounts paid in connection with the employment on a non-occasional basis, unless the CCNL says otherwise. The 13th and 14th month are included.
- **Contribution offset:** a contribution of 0.50% of pay is deducted from the yearly accrual and paid to INPS (Law 297/1982), so the net accrual is usually quoted as about **6.91%** of pay.
- **Revaluation:** on 31 December each year, the accumulated fund (excluding the current year's accrual) is revalued at **1.5% fixed plus 75% of the increase in the ISTAT consumer price index**.
- **Payment:** the whole amount is paid when employment ends, for any reason: resignation, dismissal, end of fixed term, retirement.
- **Advances:** after eight years of service, the employee can ask for an advance of up to 70% for specific reasons (medical expenses, first home purchase), within limits on the number of requests.

Example: a gross salary (RAL) of €45,000 accrues roughly €45,000 ÷ 13.5 = €3,333 a year, minus the 0.50% contribution (€225), about €3,108, before revaluation.

## Where the money sits

| Topic | India gratuity | Italy TFR |
|---|---|---|
| Legal basis | Code on Social Security, 2020 | Civil code art. 2120 |
| Qualifying period | 5 years (1 year for fixed-term) | None |
| Paid on resignation | Yes, if eligible | Yes, always |
| Annual cost | Actuarial, ≈4.81% of basic if eligible | ≈6.91% of total pay, every year |
| Base | Basic + DA (with 50% rule) | All regular pay incl. 13th/14th |
| Cap | Statutory ceiling | No cap |
| Where funded | Employer or insurer scheme | Employer, INPS treasury fund or pension fund |
| Tax treatment | Exempt up to a limit for private employees | Separate taxation (tassazione separata) |

In Italy, the employee chooses within six months of hiring whether to keep TFR with the employer or move future accruals to a **supplementary pension fund** (Legislative Decree 252/2005). Silence means the TFR goes to the default fund under the CCNL. In companies with **50 or more employees** (average in their first year of activity), TFR not sent to a pension fund is transferred monthly to the **Fondo di Tesoreria managed by INPS**, so it leaves the company's cash flow. From 2026 the Budget Law also brings in companies that grow later: 60 or more employees in 2026–2027, 50 in 2028–2031 and 40 from 2032 (INPS circular 12/2026).

## Tax

Gratuity for private employees is exempt from income tax up to a limit. TFR is subject to **separate taxation** in Italy: it is taxed at an average rate based on the employee's past income, not added to the year's income. The employer withholds the tax when paying TFR; the Agenzia delle Entrate may later recalculate.

## Why this matters for your budget

An Indian finance team may model gratuity as a small provision, since many employees leave before five years. In Italy, roughly 7% of pay accrues as a real liability every month, with no lapse. When you compare an Indian CTC to an Italian employer cost, include TFR. See [EPF/ESI vs INPS/INAIL and CTC vs RAL](/articles/epf-esi-vs-inps-inail-ctc-vs-ral-italy.html) and run your numbers in the [cost calculator](/calculator.html).

## Common questions from Indian finance teams

**Do we need to fund TFR separately?** Not with an EOR. If you set up your own Italian entity with fewer than 50 employees, TFR stays on the balance sheet as a liability until it is paid or transferred to a pension fund.

**Is TFR negotiable?** No. It is a statutory right. The CCNL can define which pay items count, but you cannot contract it away or fold it into salary.

**What if the employee leaves after three months?** They receive three months of TFR accrual in the final payslip. There is no minimum service period, unlike gratuity.

**Does variable pay count?** Regular, non-occasional pay counts, including the 13th and 14th month. Occasional one-off payments and expense reimbursements generally do not. The CCNL may specify exclusions.

**How does it show on the payslip?** The Italian payslip shows the monthly TFR accrual and the running balance, so the employee can always see what they are owed.

## What this means if you hire through an EOR

With an EOR, TFR accrues in Italian payroll every month, is shown on each payslip and is included in the monthly employer cost you are invoiced. When employment ends, the EOR pays it in the final payslip (or the INPS treasury fund or pension fund pays its share). You do not need an actuarial valuation or a gratuity trust for Italy.

Read how the [Italian employment contract](/italy-employment-contracts.html) defines pay, or [contact us](/contact.html) for a quote.

## Related guides for Indian companies

- [Termination: retrenchment vs Italian dismissal](/articles/termination-retrenchment-vs-italian-dismissal-jobs-act.html)
- [Labour Codes vs Italian civil code and CCNL](/articles/india-labour-codes-vs-italian-civil-code-ccnl.html)
- [Maternity and parental leave](/articles/maternity-benefit-vs-congedo-maternita-italy.html)

*General information, not legal advice.*

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Source: https://hiringitaly.com/articles/gratuity-vs-tfr-italy-india.html · 2026-11-09