Complete Guide to Full and Final Settlement : Rules, Formats, Settlement Letter

What is full and final settlement?

When an employee resigns, retires, is terminated or leaves a company for another reason, the employer has to settle the money that is still payable to them. This is called full and final settlement, or FnF settlement.

It can include salary up to the last working day, unused leave, gratuity, incentives and approved reimbursements. Any valid deductions, such as notice period recovery, taxes or outstanding advances, are adjusted before the final amount is paid.

FnF is usually handled by HR and payroll with inputs from finance, IT, administration and the employee's reporting manager.

What are the rules for FnF settlement in India?

The rules around FnF settlement changed after India's four Labour Codes came into force on 21 November 2025. The Code on Wages, 2019 and the Code on Social Security, 2020 are particularly relevant to employee settlements.

Under Section 17(2) of the Code on Wages, 2019, when an employee resigns, is removed or dismissed, is retrenched, or loses employment because an establishment closes, wages payable to the employee must generally be paid within two working days.

This rule is specifically for wages payable on exit. It does not mean that every amount included in an FnF settlement has the same two-day deadline.

For example, gratuity has its own rules under the Code on Social Security, 2020.

Companies updating their employee exit policies should therefore refer to the current labour laws in India instead of relying on the Payment of Wages Act, 1936 or Payment of Gratuity Act, 1972 as the current central laws. The Labour Codes consolidated the earlier laws when they came into force in November 2025.

What documents are needed for full and final settlement?

HR and payroll need a few records before they can calculate the final amount correctly. These can vary from one company to another, but commonly include:

1. Resignation or exit letter: Confirms the reason for leaving and helps establish the exit date.
2. Offer or appointment letter: Contains details such as salary, notice period and other employment terms.
3. Attendance records: These are used to calculate salary up to the last working day.
4. Leave records: The employee's available leave balance is required if unused leave is eligible for encashment.
5. Salary slips: These help payroll verify salary components and deductions.
6. Bonus or incentive records: Any amount already earned and payable to the employee needs to be checked.
7. Gratuity details: The employee's period of service and applicable wages are required to determine gratuity.
8. Expense records: Approved business expenses that have not yet been reimbursed need to be included.
9. Loan or advance records: Any outstanding employee advance or recoverable amount has to be checked before the settlement is closed.

Having these records in one place makes the calculation easier. It is also why accurate payroll processing throughout an employee's tenure matters when they eventually leave the company.

What is included in full and final settlement?

FnF includes the amounts payable to an employee and any valid deductions that need to be made before the final payment.

1. Unpaid salary

The employee has to be paid for the days worked up to their last working day.

For example, if an employee leaves in the middle of the month, payroll has to calculate the salary payable for the period worked in that month.

Salary arrears or other earned amounts that remain unpaid may also form part of the settlement.

The calculation depends on the employee's pay structure and the payroll method used by the company. A typical salary structure can contain basic pay, allowances, variable pay and statutory deductions, so payroll needs to identify which components are payable at exit.

2. Leave encashment

If an employee has unused earned or privilege leave, the available balance may be paid as leave encashment depending on the applicable law and company policy.

The calculation usually depends on the number of eligible unused leave days and the salary components used by the company for leave encashment.

Different types of leave are treated differently. Earned or privilege leave is commonly considered for encashment, while casual and sick leave may follow different rules.

The tax treatment can also depend on when the amount is received and the type of employee. The rules around leave encashment should therefore be checked separately while processing the settlement.

3. Bonus and incentives

A bonus or incentive that has already been earned and is payable under the company's policy may need to be included in FnF.

This can include performance incentives, sales incentives or other variable payments.

Whether the employee qualifies for the payout depends on the terms of the applicable bonus or incentive plan. For example, some plans may require the employee to remain employed on a particular payout date, while others may pay an amount already earned up to the last working day.

4. Gratuity

Gratuity is payable to eligible employees under the Code on Social Security, 2020.

For resignation or retirement, gratuity is generally payable after five years of continuous service. The five-year requirement does not apply in certain cases such as death or disablement. Fixed-term employees also have separate eligibility provisions under the new framework.

For a monthly-rated employee, gratuity is generally calculated using:

Gratuity = Last drawn wages × 15 ÷ 26 × Number of eligible years of service

A part of a year exceeding six months is generally counted as a completed year for the calculation.

Once gratuity becomes payable, the employer has to determine the amount and arrange payment within the period prescribed under the Code.

5. Provident Fund

Provident Fund works differently from other FnF components.

Any PF contribution due for the employee's final salary period has to be deposited by the employer as applicable. However, the employee's accumulated PF balance is not normally paid by the employer along with the FnF amount.

If the employee joins another eligible employer, the PF balance can generally be transferred using their UAN. An eligible employee may also apply for withdrawal through EPFO depending on the applicable conditions.

6. Approved reimbursements

If an employee has paid for an approved business expense from their own money, the outstanding reimbursement should be checked before their account is closed.

This can include approved travel expenses, client expenses or other business costs supported by the required bills and approvals.

7. Deductions from full and final settlement

The employer may also have amounts to recover from the employee.

Common deductions include:

• Notice period recovery
• TDS
• Outstanding salary advances
• Employee loans
• Other authorised recoveries

The basis for each deduction should be clear and supported by the employee's terms of employment, applicable policy or law.

Under the Code on Wages, deductions from wages can only be made for permitted purposes.

What clearances are required before FnF?

The financial calculation is only one part of the exit process. Different teams may also need to confirm whether anything is still pending from the employee.

Financial clearance

The finance team checks pending reimbursements, advances, employee loans and other amounts payable or recoverable.

If the employee was using a company card or had business expenses pending approval, these are also checked before the account is closed.

IT clearance

Employees normally have to return company assets such as:

• Laptop
• Monitor
• Mobile phone
• Keyboard or mouse
• Security devices
• Other IT equipment

The IT team may also close the employee's official email account and revoke access to internal systems.

If an asset has not been returned or has been damaged, any recovery should be handled according to the company's policy and applicable law.

HR clearance

HR checks the employee's last working day, notice period, leave balance and other terms linked to the exit.

For example, an employee who has not completed the required notice period may have a notice period adjustment depending on their employment terms.

HR may also check whether conditions attached to benefits such as a joining bonus apply at the time of exit.

Admin clearance

Administration usually collects items such as the employee ID card, access card, parking pass or other company property provided during employment.

How is full and final settlement calculated?

Once all payable amounts and deductions are known, the FnF calculation is fairly straightforward.

Full and Final Settlement = Total Earnings Payable − Total Deductions

Example of FnF calculation

Deductions

The final amount will be:

₹2,97,308 − ₹25,000 = ₹2,72,308

So, the employee's net full and final settlement in this example is ₹2,72,308.

The example is only for explanation. The actual calculation will depend on salary, service period, leave balance, company policies, tax and applicable law.

Full and final settlement format

There is no single FnF format used by every company. Employers can issue an FnF statement or payslip showing how the final payment has been calculated.

A typical format can include:

Employee details

• Employee name
• Employee ID
• Department
• Designation
• Date of joining
• Last working day
• Reason for leaving

Settlement details

The statement can also mention the settlement date and payment reference.

How long does full and final settlement take?

There is no single timeline for every item that appears in an FnF statement.

The most important rule for wages is Section 17(2) of the Code on Wages, 2019. When an employee resigns, is dismissed or removed, is retrenched, or becomes unemployed because the establishment closes, wages payable to them must generally be paid within two working days.

Other payments may follow different rules.

For example, gratuity is governed separately under the Code on Social Security, 2020.

A company may take additional time to finish administrative activities such as collecting assets or completing documentation, but its internal FnF policy cannot be used to postpone a payment beyond an applicable statutory deadline.

FAQs

Is full and final settlement mandatory after resignation?

An employer has to pay amounts legally due to an employee when employment ends. FnF is the process companies commonly use to calculate those payments and applicable recoveries.

Is FnF taxable?

There is no separate tax rate for the entire FnF amount. Tax depends on the individual component. Salary and some bonuses may be taxable as salary income, while exemptions may apply to eligible gratuity or leave encashment subject to the Income-tax Act and applicable conditions.

Is gratuity included in FnF?

Yes, gratuity is normally accounted for during the employee's final settlement if the employee is eligible to receive it.

Is PF included in FnF?

The employee's accumulated PF balance is generally not paid directly by the employer as part of the FnF amount. PF transfer or withdrawal is handled separately through EPFO.

Can a company hold an employee's FnF?

A company may need to calculate dues, verify claims and complete valid recoveries. However, internal procedures cannot override the payment timelines prescribed by law.

For wages covered under Section 17(2) of the Code on Wages, 2019, the general timeline on the specified exits is two working days.

What should an employee do if FnF is delayed?

The employee should first contact HR or payroll and ask for the breakup of the amount that is pending.

It helps to keep copies of the resignation or termination letter, salary slips, leave records, reimbursement approvals and other supporting records.

If a statutory payment remains unpaid, the employee can consider approaching the relevant labour or statutory authority.