What is an appraisal letter?

A formal letter that records the outcome of an appraisal, any change in compensation, and the effective date. It is the official document the employee, payroll, and auditors refer to later. Most Indian SMEs issue it once a year, typically around the April cycle.

Does the Code on Wages 2019 require a specific appraisal format?

No. The Code does not prescribe a format for appraisal letters. It does require that wages be defined clearly, and that allowances do not exceed 50 percent of total compensation. An appraisal letter with a clean breakup of basic wage, allowances, and variable earnings satisfies that requirement on its face.

Should the appraisal letter include a wage breakup?

Yes. Statutory benefits hang on how the wage is defined. A breakup of basic, allowances, and variable earnings prevents disputes during inspection and at exit. Skipping it tends to save a few minutes during writing and cost considerably more later.

Is variable pay part of the wage?

No. Variable earnings sit outside the wage figure and should not be folded in. EPF, ESI, and gratuity are calculated on the wage, not on variable pay. The letter should state that variable earnings are policy linked and not guaranteed.

Can companies promise future increments in the letter?

Better to leave them out. A written promise becomes a commitment regardless of business conditions. State the current revision clearly. Future revisions belong in policy, not in the letter.

Is the appraisal letter legally binding?

It is an official record. Indian labour courts and conciliation officers treat it as evidence of what was agreed. Wording that creates obligations the company did not intend will surface later, often at exit. The cleanest letter says exactly what was decided and nothing more.

Should SMEs store appraisal letters digitally?

Yes. A digital copy is faster to find at audit time, easier to attach to the employee record, and harder to lose. Most labour inspections in India now ask for digital trails, not paper files.

How does Offrd help with appraisal letters?

Offrd generates the letter from the employee's existing record, with the wage structure already configured. The revised numbers flow into payroll without a separate retype. The format carries the three bucket structure by default, so each cycle uses the same template.

What an Appraisal Letter Should Cover in India

An appraisal letter in India should state the appraisal period, give a short performance summary, set out the revised compensation with a clean wage breakup, confirm that EPF, ESI, and gratuity continue as before, and carry an effective date and an authorised signature. The Code on Wages 2019 puts weight on a clear wage definition, which makes the breakup the part most worth getting right.

An appraisal letter is the document a payroll team, an auditor, or an employee will pick up months after the review is done. It is the official record of what changed. If the letter rolls basic wage, allowances, and variable pay into a single number, that single number is what creates the next problem. A clean breakup keeps inspections short and keeps the payroll record honest. The work to write a clear letter once is small. The work to fix an unclear letter later is not.

Use Offrd for appraisal letters Book a demo

Trusted by 4,000+ companies across India. 50 free credits on signup.

Why the format matters now

An appraisal letter is more than a thumbs up. The Code on Wages 2019 redefined wages and put more weight on a clean structure. If your letter folds basic, HRA, special allowance, and variable into one CTC number, you have removed the very breakup that statutory benefits depend on. The employee remembers the total. The auditor wants the components. The next exit calculation needs both. Writing them in once, clearly, settles all three readers in advance.

What the letter should cover

Employer and employee identityCompany name and address, employee name, employee ID if used, role, and department. Keep it factual. The letter has to identify the parties without ambiguity, because the same letter may be read at exit, during a labour department visit, or by a future employer doing background checks.
The appraisal periodThe window you assessed. For an annual cycle, April to March is common in India. State it. A letter dated 15 April without a stated period leaves room for argument about what was actually reviewed.
Performance summaryA short paragraph on overall performance. This is the letter, not the evaluation file. One or two sentences. Detailed feedback belongs in the review record, not in a document that may end up attached to a future dispute.
Revised compensationBasic wage, allowances, and variable earnings broken out separately. Each component on its own line, each as a monthly or annual figure consistently. If the company runs both monthly and annual figures, pick one and be explicit.
Wage definition alignmentBe clear on what the basic wage is, since EPF, ESI, and gratuity all hang on it. The Code on Wages 2019 caps allowances at 50 percent of total compensation. A letter that respects the cap on its face does not invite recalculation later.
Effective dateThe date from which payroll picks up the new numbers. For an April cycle, this is usually 1 April. If the increment is staggered or backdated, the letter still needs the specific date so payroll knows where to start.
Statutory continuityA line confirming EPF, ESI, and gratuity continue as required. This sounds redundant. It is not. An audit reads it as confirmation that you understood the obligation when you raised the salary.
Authorised signatoryName and designation of the person signing. A founder, HR head, or director, depending on company structure. Avoid signature blocks that just say "Management" without a name. Anyone who needs to verify the letter later will want to know who actually signed it.

Code on Wages 2019, in plain terms

The Code on Wages 2019 redefined the term "wages" and applied it across earlier acts including the Payment of Wages Act, the Minimum Wages Act, the Payment of Bonus Act, and the Equal Remuneration Act. Wages now include basic pay and dearness allowance. Allowances that sit outside that definition are capped at 50 percent of total compensation. If they cross the cap, the excess is treated as wages for EPF, ESI, and gratuity.

For an appraisal letter, the practical effect is simple. Keep three buckets visible in the letter. Each line is one figure. The reader can total them. The auditor can see how the structure complies with the 50 percent rule. The payroll record carries the same three buckets.

Three buckets, each doing one job

Basic wage

The figure EPF (12 percent employer plus 12 percent employee), ESI (3.25 percent employer plus 0.75 percent employee), and gratuity (15 days wage per year of service, payable after one year) are calculated on. Set it too low and the company saves on contributions but creates Code on Wages exposure. Set it too high and EPF and gratuity costs rise. Most Indian SMEs keep basic at 40 to 50 percent of total fixed compensation.

Allowances

HRA, conveyance, special allowance, and similar heads. These help the employee with tax planning and are an important part of total compensation. The Code's 50 percent cap applies to the sum of allowances against total compensation, not to any single allowance head on its own.

Variable earnings

Performance pay, sales incentive, bonus. The letter should note that these are policy linked and not guaranteed. Folding them into wage creates a future claim. Keeping them out keeps the wage figure honest and the letter clean.

Common mistakes worth avoiding

A few patterns cause most of the appraisal letter trouble in Indian SMEs. Each has a small fix and a real downside if skipped.

One lump compensation figureThe reader cannot tell what is wage and what is allowance. Statutory benefits depend on the answer. The letter ends up doing half its job.
Variable pay clubbed with fixed wagesAn employee who reads a single CTC line tends to remember the whole figure. When the variable does not pay out in full, they treat it as a salary cut. The next year's appraisal conversation starts in the negative.
Future increments promised in writingA line like "you will receive a 10 percent increment next April" becomes a commitment. Business conditions change. The company is on the hook regardless. Keep the letter to the current revision.
No effective datePayroll has to guess. HR ends up arbitrating between the employee and finance over a date that should have been written in the letter.
Loose language"Subject to performance" and "as per management discretion" sound safe and invite interpretation later. Be specific or leave the clause out.
No copy on fileThe audit, the dispute, or the exit calculation all need the original letter. If it is not stored properly, the conversation becomes a recollection exercise. A digital record paired with the employee file is the floor.

Sample appraisal letter format

A short, plain sample. Adjust the wording and figures to suit how your team usually writes.

Company Name Company Address Date: 15 April 2026 Subject: Appraisal Outcome and Compensation Revision This letter records completion of your appraisal for the period April 2025 to March 2026. Based on the performance evaluation, your revised compensation will apply from 1 April 2026. Revised Monthly Compensation Basic Wage: Rs. 32,000 Allowances: Rs. 26,000 Variable Earnings: Rs. 6,000 (policy linked, not guaranteed) Statutory benefits such as EPF, ESI, and gratuity will continue as applicable under law. We appreciate your contribution during the previous cycle and look forward to your continued performance. Sincerely, Authorised Signatory Company Name

The same letter, issued from Offrd, pulls the wage structure already configured on the employee record. The breakup matches the payslip, since both come from the same source.

How Offrd handles appraisal cycles

Offrd generates appraisal and increment letters from the existing employee record. The wage structure already configured for the employee, basic, HRA, allowances, and variable, flows directly into the letter. The revised figures update payroll the same day. There is no separate spreadsheet to maintain alongside.

The template carries the three bucket structure by default. Each letter you issue across an annual cycle uses the same format. Audit pulls become straightforward, since every letter for every employee is in one library and follows the same layout. The HR person running the cycle does not have to retype figures into payroll afterwards.

Offrd does not run the performance review itself. It generates the letter that follows. For SMEs that handle the review in a spreadsheet or a manager conversation, this is usually the right split of work.

50 free credits on signup. ₹99 per letter after that, or ₹50 per active employee per month for unlimited. Used by 4,000+ Indian companies across 350+ cities. Related reading: HR policies a startup needs from day one.

Create account Book demo

Frequently asked questions

What is an appraisal letter?: A formal letter that records the outcome of an appraisal, any change in compensation, and the effective date. It is the official document the employee, payroll, and auditors refer to later. Most Indian SMEs issue it once a year, typically around the April cycle.
Does the Code on Wages 2019 require a specific appraisal format?: No. The Code does not prescribe a format for appraisal letters. It does require that wages be defined clearly, and that allowances do not exceed 50 percent of total compensation. An appraisal letter with a clean breakup of basic wage, allowances, and variable earnings satisfies that requirement on its face.
Should the appraisal letter include a wage breakup?: Yes. Statutory benefits hang on how the wage is defined. A breakup of basic, allowances, and variable earnings prevents disputes during inspection and at exit. Skipping it tends to save a few minutes during writing and cost considerably more later.
Is variable pay part of the wage?: No. Variable earnings sit outside the wage figure and should not be folded in. EPF, ESI, and gratuity are calculated on the wage, not on variable pay. The letter should state that variable earnings are policy linked and not guaranteed.
Can companies promise future increments in the letter?: Better to leave them out. A written promise becomes a commitment regardless of business conditions. State the current revision clearly. Future revisions belong in policy, not in the letter.
Is the appraisal letter legally binding?: It is an official record. Indian labour courts and conciliation officers treat it as evidence of what was agreed. Wording that creates obligations the company did not intend will surface later, often at exit. The cleanest letter says exactly what was decided and nothing more.
Should SMEs store appraisal letters digitally?: Yes. A digital copy is faster to find at audit time, easier to attach to the employee record, and harder to lose. Most labour inspections in India now ask for digital trails, not paper files.
How does Offrd help with appraisal letters?: Offrd generates the letter from the employee's existing record, with the wage structure already configured. The revised numbers flow into payroll without a separate retype. The format carries the three bucket structure by default, so each cycle uses the same template.

Issue appraisal letters that match your wage policy

Standard templates. Clean records. Salary changes go straight into payroll without anyone retyping the same numbers.

Create account Book demo See pricing

50 free credits on signup. No credit card needed.