Appraisal and Increment Letter Format for Indian SMEs (4 Templates)

An appraisal or increment letter is the written record that tells an employee their performance rating, their new salary and when it takes effect. For an Indian SME, getting it right avoids disputes, payroll errors and awkward conversations later. This guide gives you four ready-to-use formats (appraisal with increment, increment only, promotion with increment, and no increment this cycle), a step-by-step process and timeline, and a checklist of what every letter must include, including the new labour code wage rules that affect how you split the revised CTC.

Appraisal letter vs increment letter: what is the difference?

The terms are often used interchangeably, but they do slightly different jobs.

Letter	Purpose	When to use
Appraisal letter	Records the outcome of the performance review: rating, key feedback and any salary change	After every annual or half-yearly review
Increment letter (salary revision letter)	Confirms only the change in pay and effective date	Mid-year revisions, market corrections, retention raises, or when appraisal feedback is shared separately
Promotion letter	Confirms the new designation, reporting line, responsibilities and pay	Role change, usually alongside an increment
Deferred or no-increment letter	Explains that pay is unchanged this cycle and what happens next	Low rating, probation extension, or business constraints

What every appraisal or increment letter must include

Use this as a checklist before anyone signs.

• Company letterhead, date and a unique reference number.
• Employee name, employee code, designation and department.
• Review period (for example, 1 April 2026 to 31 March 2027).
• Performance rating or band, using the same scale as your appraisal form.
• Current annual CTC and revised annual CTC, both in figures.
• Percentage increase, if you share it.
• Effective date of the revision. This decides arrears, so be precise.
• Revised salary breakup as an annexure: basic, HRA, allowances, employer PF, gratuity provision, variable pay.
• Variable pay or bonus terms, if any, with the conditions for payout.
• A confidentiality line, if that is your policy.
• A statement that all other terms of employment remain unchanged.
• Signature of an authorised signatory and a line for the employee’s acknowledgement.

The labour code point you cannot ignore

India’s four labour codes came into force on 21 November 2025, according to the Ministry of Labour and Employment. The Code on Wages uses a single definition of “wages”. If allowances excluded from wages (such as HRA, conveyance and certain other allowances) together exceed 50% of total remuneration, the excess is added back to wages for calculations such as gratuity. A useful plain-language summary of the ministry’s FAQs on this point is available from SCC Online.

In practice, this means that when you revise salaries, a structure with a very small basic and large allowances may no longer reduce PF and gratuity costs the way it used to. Run the revised breakup past your payroll provider or CA before you print the letters. The labour codes also require employers to give appointment letters to employees, so new joiners should already have a written record that your increment letters can build on.

Format 1: Appraisal letter with increment

[Company Letterhead]

Ref: HR/APR/2027/[number]
Date: [date]

To
[Employee Name]
Employee Code: [code]
[Designation], [Department]

Subject: Annual performance appraisal and salary revision for FY 2026-27

Dear [First Name],

Thank you for your contribution during the review period 1 April 2026 to 31 March 2027. Based on the performance review discussed with you on [date], your overall rating for the year is [rating, e.g. “Exceeds Expectations (4 on 5)”].

In recognition of your performance, we are pleased to revise your annual cost to company (CTC) from Rs [current CTC] to Rs [revised CTC], an increase of [x]%, effective 1 April 2027. The revised salary breakup is attached as Annexure A.

Your key strengths noted this year include [one or two specific points]. For the coming year, we have agreed that you will focus on [one or two goals].

All other terms and conditions of your employment remain unchanged. Please treat the contents of this letter as confidential.

We look forward to your continued contribution.

For [Company Name]
[Name]
[Designation]

Acknowledged: ____________ (Employee signature and date)

Format 2: Increment letter (salary revision only)

[Company Letterhead]

Date: [date]

[Employee Name], [Designation], Employee Code: [code]

Subject: Revision of salary

Dear [First Name],

We are pleased to inform you that your annual CTC has been revised from Rs [current] to Rs [revised] with effect from [date]. The revised monthly breakup is given in the annexure.

[Optional reason: “This revision reflects your expanded responsibility for the Surat dispatch team.” or “This is part of a market-based salary correction for your role.”]

Any arrears from the effective date will be paid with the salary for [month].

All other terms of your employment remain the same.

For [Company Name]
[Authorised Signatory]

Format 3: Promotion with increment

Subject: Promotion to [New Designation] and salary revision

Dear [First Name],

We are delighted to promote you from [Current Designation] to [New Designation] with effect from [date], in recognition of your performance and readiness for wider responsibility.

In your new role you will report to [Name, Designation] and will be responsible for [two or three key responsibilities].

Your annual CTC will be revised from Rs [current] to Rs [revised] from the same date. The revised breakup is attached.

All other terms of employment remain unchanged. Congratulations, and we wish you success in the new role.

For [Company Name]
[Authorised Signatory]

Format 4: No increment or deferred increment

This is the letter most managers avoid writing, and that is exactly why it matters. A clear, respectful letter protects both sides.

Subject: Outcome of performance review for FY 2026-27

Dear [First Name],

Thank you for taking part in the annual performance review discussed with you on [date]. Your overall rating for the year is [rating].

As discussed, your salary will remain at Rs [current CTC] for now. We have agreed on the following goals for the next [three/six] months: [goal 1], [goal 2], [goal 3]. Your manager will review progress with you on [date], and the company will consider a salary revision based on that review.

We value your work and want to support you in meeting these goals. Please speak to [manager/HR] if you need any help or training.

For [Company Name]
[Authorised Signatory]

Sample salary breakup annexure

Here is an illustrative revised breakup for an employee moving from Rs 4,80,000 to Rs 5,28,000 CTC (a 10% raise). The split keeps basic plus DA at just over half of gross pay, so allowances stay within the 50% limit. Your own structure will depend on your PF policy, state rules and payroll setup, so treat this as a format, not advice.

Component	Monthly (Rs)	Annual (Rs)
Basic + DA	20,000	2,40,000
HRA	8,000	96,000
Special allowance	10,234	1,22,808
Gross salary	38,234	4,58,808
Employer PF (12% of basic, capped as per policy)	1,800	21,600
Gratuity provision (approx. 4.81% of basic)	962	11,544
Annual performance bonus (variable, subject to policy)	—	36,048
Total CTC	—	5,28,000

Here employer PF is capped at 12% of Rs 15,000, which many SMEs follow; others contribute on full basic. Whatever you choose, be consistent across the team and match what the payslip will show.

The appraisal process and timeline for SMEs

Most Indian businesses follow the April–March financial year. A simple, repeatable calendar looks like this.

When	Step	Who
Early January	Announce the cycle, share forms and deadlines	HR or owner
Mid-January to mid-February	Employee self-assessment	Employees
February	Manager assessment and ratings	Reporting managers
Late February	Calibration: compare ratings across teams, set the increment budget	Owner, managers, HR
March	One-to-one review meetings	Managers with each employee
Last week of March	Letters prepared, checked and signed	HR, accounts
Early April	Letters handed over; new salary in April payroll	HR, payroll

Setting the increment budget

1. Decide the total amount the business can afford for the year, for example 8% of the current salary bill.
2. Link increments to ratings with a simple matrix, such as 4% for “meets”, 8% for “exceeds” and 12% for “outstanding”.
3. Adjust for market data on critical roles you cannot afford to lose.
4. Check the total against the budget before any conversation happens.

Worked example

For example, a 25-person textile trading firm in Surat with a monthly salary bill of Rs 7,50,000 might set an 8% budget, or Rs 60,000 a month extra. If five people are rated outstanding, fifteen meet expectations and five need improvement, a 12/7/0 split at an average salary of Rs 30,000 would cost about Rs 49,500 a month, leaving roughly Rs 10,000 for market corrections. The owner can then fine-tune individual cases instead of guessing person by person.

How to deliver the letter well

• Talk first, hand over second. The employee should hear the rating and the number from their manager in a one-to-one meeting before getting the letter.
• Keep the letter factual. Emotional language and detailed criticism in a letter can be misread. Keep feedback in the meeting and the appraisal form.
• Send a signed PDF and keep a copy. Store the acknowledged copy in the employee file.
• Check payroll. Make sure the April payslip matches the letter exactly, including arrears.
• Be ready for questions. Managers should know how ratings were calibrated and how the raise was decided.

For senior hires or promotions you want to announce publicly, such as a new head of sales, a short external announcement can follow the internal letter. Our press release samples and the guide on writing a press release in India show the format.

Common mistakes to avoid

• Writing “increment of 10%” without the actual figures. Always state both old and new CTC.
• Leaving out the effective date, which leads to disputes about arrears.
• Changing the salary structure without checking PF, gratuity and the 50% wage rule.
• Promising future increments in writing (“you will get 15% next year”).
• Using a different rating scale in the letter from the one on the appraisal form.
• Sending letters by email before the review meeting.

Frequently Asked Questions

Is an increment letter legally required in India?

There is no single rule that requires a separate increment letter, but written records of pay protect both sides and help with wage, PF and gratuity compliance. Many companies treat the letter as an addendum to the appointment letter. Check with an HR or labour law professional for your situation.

Should the appraisal letter mention the percentage increase?

It is optional. Always include the old and new CTC in figures; the percentage is helpful but not essential.

When should the increment be effective?

Most SMEs use 1 April to match the financial year. Others use the employee’s joining anniversary. Whatever you choose, state the exact date in the letter.

Can we give an increment letter without an appraisal?

Yes. A salary revision letter (Format 2) works for mid-year raises, market corrections and retention offers.

How do the new labour codes affect increments?

The Code on Wages, in force since 21 November 2025, adds back allowances above 50% of total pay into “wages”. This can change PF, gratuity and bonus calculations, so revised breakups should be checked before letters are issued.

Should variable pay be included in CTC?

Many companies include target variable pay in CTC but state clearly that payout depends on performance and company results. Spell out the conditions in the letter or annexure.

Before your next review cycle

Save these four formats as templates, fix your rating scale and increment matrix, and ask your payroll provider to check one sample breakup against the 50% wage rule. With those in place, the March letter rush becomes a two-day job instead of a two-week scramble.