TFR (Trattamento di Fine Rapporto — severance indemnity) is a mandatory deferred-compensation mechanism established by Law 297/1982. Each year the employer sets aside an amount equal to the employee's total annual remuneration divided by 13.5, revalued annually by a fixed rate of 1.5 percent plus 75 percent of the ISTAT (Italian national statistics office) consumer-price index. The fund accrues throughout the employment relationship and is paid as a lump sum when the contract ends, regardless of the reason for termination.
Employees at companies with more than 50 employees may choose to redirect future TFR accruals to a supplementary pension fund (fondo pensione); contributions directed to a pension fund attract more favourable tax treatment. TFR held by the employer is taxed at a reduced separate-income rate upon payment, while pension-fund TFR is taxed as pension income.
For employers, TFR represents a significant balance sheet liability. Since 2007, companies with more than 49 employees must transfer current TFR accruals monthly to INPS via the Fondo di Tesoreria (Treasury Fund), rather than retaining them internally, which has reduced the financing advantage historically associated with TFR accumulation.