Full & Final Settlement (F&F): Calculation, Checklist & 2-Day Timeline Under New Code
What Is Full & Final Settlement (F&F)?
When an employee leaves an organisation — whether they resign, are terminated, retire, or their contract simply ends — there is one process that every employer must get right: Full & Final Settlement, commonly called F&F.
Full & Final Settlement is the comprehensive process of calculating, reconciling, and paying all financial dues between an employer and a departing employee. It covers everything the company owes the employee (unpaid salary, leave encashment, gratuity, bonuses) as well as everything the employee owes the company (notice period recovery, outstanding loans, unreturned assets).
| Legal Mandate (Effective 21 November 2025): Under Section 17(2) of the Code on Wages 2019, all wage-related F&F components must be paid within 2 working days of the employee’s last working day. Non-compliance attracts fines up to ₹50,000 for a first offence and ₹1,00,000 for repeat violations within five years. |
Getting F&F right is not optional — it is a legal obligation. A delayed or miscalculated settlement exposes the company to penalties, labour disputes, and reputational damage. This guide walks you through every component, formula, worked example, and compliance step you need.
When Does F&F Apply? 8 Employment-Exit Scenarios
F&F is triggered whenever the employment relationship ends, regardless of who initiates the separation. Here are all eight scenarios:
1. Resignation (Voluntary Exit)
Employee submits written resignation and serves or buys out the notice period.
2. Termination for Cause (Misconduct)
Employer terminates after a domestic enquiry for proven misconduct — theft, fraud, habitual absenteeism, insubordination.
3. Termination for Performance
Employee fails to meet performance expectations despite a Performance Improvement Plan (PIP).
4. Retrenchment (Economic Reasons)
Employer reduces headcount due to business downturn, restructuring, or redundancy. Triggers retrenchment compensation.
5. Retirement (Age-Based)
Employee reaches superannuation age (typically 58–60 in private sector, 60 in government).
6. End of Fixed-Term Contract
Contract expires naturally. Under new Labour Codes, fixed-term employees get pro-rata gratuity regardless of tenure.
7. Death of Employee
All dues paid to the nominee or legal heir. Gratuity is payable even if service is under 5 years (in case of death).
8. Absconding (Unauthorised Absence)
Employee stops attending work without resignation. Employer must follow notice procedure before terminating and processing F&F.
| Key Point: The F&F process and formula remain the same across all scenarios. What changes is which components apply — for example, retrenchment compensation only applies to retrenchment, and notice period recovery only applies when the employee has not served the full notice period. |
F&F Components: What the Employer Must Pay
These are the amounts the employer owes the departing employee. Not all components apply in every case — eligibility depends on the exit scenario, tenure, and terms of employment.
1. Unpaid Salary (Pro-Rata)
The employee is entitled to salary for every day worked in the last month, calculated on a pro-rata basis.
| Formula: Unpaid Salary = (Monthly Gross Salary ÷ Total Working Days in Month) × Days Actually Worked |
Most Indian companies use 26 working days as the denominator, aligning with the Gratuity Act convention. Some organisations use calendar days (30 or 31). Whichever method your company follows, apply it consistently.
2. Leave Encashment
Unused Earned Leave (EL) or Privilege Leave (PL) is encashable at the time of separation. Casual Leave (CL) and Sick Leave (SL) lapse at the end of each year and cannot be encashed.
| Formula: Leave Encashment = (Basic Salary + DA) ÷ 30 × Number of Unused EL Days |
| Tax Benefit: Leave encashment received at the time of retirement or resignation is exempt up to ₹25 lakh (lifetime cumulative limit) under Section 10(10AA) of the Income Tax Act. Any amount above this threshold is taxable as salary income. |
3. Gratuity
Gratuity is a statutory benefit payable to employees who have completed 5 or more years of continuous service. Under the new Labour Codes, fixed-term employees receive pro-rata gratuity without the 5-year minimum requirement.
| Formula: Gratuity = (15 × Last Drawn Basic + DA × Years of Service) ÷ 26 |
Important distinctions:
• Tax-exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act
• Gratuity has its own 30-day payment timeline under Section 4(2) of the Payment of Gratuity Act — separate from the 2-day F&F rule
• For death cases: Gratuity is payable even if service is under 5 years
• Fixed-term employees: Gratuity is pro-rated based on actual service duration
4. Pro-Rata Bonus
Under the Payment of Bonus Act, 1965, establishments with 20+ employees must pay a minimum bonus of 8.33% and a maximum of 20% of basic salary to employees earning up to ₹21,000 per month.
| Formula: Pro-Rata Bonus = Basic Salary × Bonus % × (Months Worked in FY ÷ 12) |
5. Retrenchment Compensation (If Retrenched)
This applies only when the employer terminates the employee due to economic reasons (redundancy, restructuring, downsizing). It does not apply to resignation, misconduct-based termination, or retirement.
| Formula: Retrenchment Compensation = 15 Days’ Average Pay × Years of Completed Service |
Average pay is calculated as the average of wages drawn in the 3 calendar months immediately preceding retrenchment.
6. Notice Period Pay (Employer-Side)
If the employer terminates an employee without allowing them to serve the notice period, the employer must pay the employee the full salary for the notice period. This is essentially compensation for not giving the employee time to find a new job.
7. Pending Reimbursements
Any reimbursement claims that have been approved but not yet disbursed must be included in the F&F settlement. This includes travel reimbursements, mobile phone allowances, medical expense claims, and any other approved expense submissions.
8. Pending Incentives and Commissions
Performance bonuses, sales commissions, referral bonuses, or any other variable pay components that the employee has earned but not yet received must be settled as part of F&F. The key word is ‘earned’ — the employee must have met the qualifying criteria before their last working day.
F&F Deductions: What the Employer Can Recover
Just as the employer owes the employee certain amounts, there are legitimate deductions that can be made from the F&F settlement. These must be documented, transparent, and legally defensible.
1. Notice Period Recovery
If the employee resigns and does not serve the full contractual notice period (or the portion not waived by the employer), the unserved days can be recovered from the F&F amount.
• Typically calculated on Basic Salary, though some companies use Gross Salary
• The employer has the discretion to waive this recovery partially or fully
• Must be specified in the employment contract or offer letter to be enforceable
2. Outstanding Loan or Salary Advance Balance
Any pending EMIs on employee loans (emergency loans, festival advances, salary advances) issued by the company are deducted from the F&F payout. The remaining loan balance is recovered in full at exit.
3. Training Bond Recovery
If the company invested in specialised training (certifications, overseas training, higher education sponsorship) and the employee signed a service bond, the pro-rated training cost may be recovered if the employee leaves before the bond period expires.
| Legal Caution: Indian courts have taken a mixed view on training bonds. For the recovery to be enforceable, the bond amount must be reasonable, proportionate to actual training costs, and not act as a restraint on employment. Unreasonable bond clauses are frequently struck down. |
4. Excess Leave Taken (Negative Leave Balance)
If the employee has taken more leave than their entitlement (negative leave balance), the excess days are deducted at the per-day salary rate. For example, if an employee’s EL balance shows -3 days, three days’ salary is deducted.
5. Company Assets Not Returned
Any company property that has not been returned during the exit clearance process can be deducted at the depreciated (book) value. Common items include:
• Laptop / Desktop computer
• Mobile phone or SIM card
• Employee ID card and access cards
• Uniforms, safety equipment, or tools
• Company vehicle or parking pass
6. TDS on F&F Components
The employer is legally required to deduct Tax Deducted at Source (TDS) on all taxable components of the F&F settlement. Key exemptions to remember:
• Gratuity: Exempt up to ₹20 lakh (Section 10(10))
• Leave Encashment: Exempt up to ₹25 lakh (Section 10(10AA))
• Retrenchment Compensation: Exempt up to ₹5 lakh (Section 10(10B))
All other F&F components (unpaid salary, bonus, notice pay, incentives) are fully taxable as salary income. TDS is deducted based on the employee’s applicable tax slab.
7. Professional Tax (Last Month)
Professional Tax for the employee’s last month of service must be deducted and remitted to the respective state government. The amount varies by state — for example, Maharashtra charges ₹200 per month for employees earning above ₹10,000.
The F&F Master Formula
Here is the complete formula that brings together every component discussed above:
| Net F&F Payable = ( Unpaid Salary + Leave Encashment + Gratuity + Pro-Rata Bonus + Notice Pay + Reimbursements + Incentives ) MINUS ( Notice Recovery + Loan Balance + Training Bond + Excess Leave + Assets + TDS + Professional Tax ) |
Not every component will apply in every case. For instance, a retiring employee will not have notice period recovery, and a resigning employee with less than 5 years of service will not receive gratuity. The master formula is your complete checklist — run through each item and mark it as applicable or not applicable for the specific separation.
Worked Example 1: Employee Resigns (Serves Full Notice)
Employee Profile
| Parameter | Details |
| Employee Name | Ravi (Software Developer) |
| Tenure | 4 years |
| Monthly Gross Salary | ₹60,000 |
| Basic Salary | ₹30,000 |
| Dearness Allowance (DA) | Nil |
| Last Working Day | 15 July 2026 |
| Days Worked in July | 11 out of 22 working days |
| Earned Leave Balance | 18 days |
| Notice Period | 60 days (served in full) |
| Outstanding Loans | Nil |
F&F Calculation — Payable to Employee
| Component | Calculation & Amount |
| Unpaid Salary (11 days) | ₹60,000 ÷ 26 × 11 = ₹25,385 |
| Leave Encashment (18 days) | ₹30,000 ÷ 30 × 18 = ₹18,000 |
| Gratuity | Not eligible (less than 5 years service) |
| Pro-Rata Bonus (Apr–Jul) | ₹30,000 × 8.33% × 3.5/12 = ₹729 |
| Notice Pay | Not applicable (served full notice) |
| Pending Reimbursements | Nil |
| Total Payable | ₹44,114 |
F&F Calculation — Deductions
| Deduction | Amount |
| Notice Period Recovery | Nil (full notice served) |
| TDS (estimated) | ₹2,500 |
| Professional Tax (July) | ₹200 |
| Total Deductions | ₹2,700 |
| Net F&F Payable to Ravi: ₹44,114 − ₹2,700 = ₹41,414 |
This amount must be credited to Ravi’s bank account within 2 working days of 15 July 2026, i.e., by 17 July 2026.
Worked Example 2: Employee Terminated (Retrenchment)
Employee Profile
| Parameter | Details |
| Employee Name | Priya (Operations Manager) |
| Tenure | 8 years |
| Monthly Gross Salary | ₹80,000 |
| Basic Salary | ₹40,000 |
| Last Working Day | 20 July 2026 |
| Days Worked in Last Month | 20 out of 26 working days |
| Earned Leave Balance | 24 days |
| Reason for Exit | Retrenchment (business restructuring) |
| Outstanding Loan | ₹25,000 |
F&F Calculation — Payable to Employee
| Component | Calculation & Amount |
| Unpaid Salary (20 days) | ₹80,000 ÷ 26 × 20 = ₹61,538 |
| Leave Encashment (24 days) | ₹40,000 ÷ 30 × 24 = ₹32,000 |
| Gratuity (8 years) | 15 × ₹40,000 × 8 ÷ 26 = ₹1,84,615 |
| Pro-Rata Bonus (Apr–Jul) | ₹40,000 × 8.33% × 4/12 = ₹1,111 |
| Retrenchment Compensation | 15 × (₹80,000 ÷ 26) × 8 = ₹3,69,231 |
| Notice Pay (1 month) | ₹80,000 (employer-initiated exit) |
| Total Payable | ₹7,28,495 |
F&F Calculation — Deductions
| Deduction | Amount |
| Outstanding Loan Balance | ₹25,000 |
| TDS (on taxable components) | ₹15,000 |
| Total Deductions | ₹40,000 |
| Net F&F Payable to Priya: ₹7,28,495 − ₹40,000 = ₹6,88,495 |
Notice how Priya’s F&F is significantly higher than Ravi’s. This is because retrenchment triggers additional statutory entitlements — retrenchment compensation and employer-side notice pay — that do not apply in a voluntary resignation.
Worked Example 3: Absconding Employee
An absconding employee is one who stops coming to work without submitting a resignation, without taking approved leave, and without any communication. This is one of the most challenging F&F scenarios for HR teams.
Step-by-Step Procedure for Absconding Cases
1. Issue First Warning Notice (Day 1–3): Send a written notice via registered post and email asking the employee to report to work or explain their absence within 48–72 hours.
2. Issue Second Warning Notice (Day 7–10): If no response, send a second notice warning that continued absence will be treated as voluntary abandonment of employment.
3. Issue Final Show-Cause Notice (Day 15–20): Send a show-cause notice with a clear deadline (7 days) to respond. State that failure to respond will result in termination.
4. Terminate Services (Day 30–45): If no response to all three notices, issue a formal termination letter citing unauthorised absence and failure to respond to notices.
5. Calculate F&F: Process the settlement normally, but deduct the full notice period recovery since the employee did not serve or buy out the notice period.
6. Hold F&F for 45–60 Days: Keep the F&F amount on hold in case the employee resurfaces. If they do not claim it, transfer it after the holding period.
7. Asset Recovery: If company assets (laptop, phone, ID card) are not returned, deduct the depreciated value from the F&F amount.
| Documentation is Critical: Keep copies of all three notices (with postal receipts), email records, attendance records showing absence, and the final termination letter. This documentation protects the company if the employee files a claim with the labour court later. |
The 2-Day Timeline: Code on Wages Requirement
The most significant change introduced by the Code on Wages 2019 — which came into effect on 21 November 2025 — is the strict 2-working-day timeline for settling F&F dues.
What the Law Says
| Section 17(2), Code on Wages 2019: “Where an employee is (a) removed or dismissed from service, (b) retrenched, (c) resigns, or (d) the period of employment on a contract expires, the wages payable to him shall be paid within two working days of such removal, dismissal, retrenchment, resignation, or expiry of the contract.” The term “wages” is broadly defined to include all remuneration components: basic pay, dearness allowance, allowances, bonuses, and any other component payable. |
Penalties for Non-Compliance
| Offence | Penalty |
| First offence | Fine up to ₹50,000 |
| Repeat offence (within 5 years) | Fine up to ₹1,00,000 |
| Continued non-compliance | Additional daily penalty until compliance |
Gratuity Exception
Gratuity has its own separate timeline. Under Section 4(2) of the Payment of Gratuity Act, 1972, gratuity must be paid within 30 days of it becoming payable. If the employer delays beyond 30 days, simple interest at 10% per annum is payable on the gratuity amount from the date it became due.
Practical Challenges with the 2-Day Rule
While the law mandates 2 working days, most organisations face practical challenges in meeting this deadline:
• Exit clearance from multiple departments (IT, Admin, Finance, HR, Reporting Manager) takes time
• Asset verification and return process can be delayed
• Leave balance reconciliation and final payroll calculations require coordination
• TDS computation on the final settlement requires accurate income projections for the year
• Bank processing time for NEFT/RTGS transfers
| Best Practice: Start the exit clearance and F&F calculation process as soon as the resignation is accepted — do not wait until the last working day. With automated payroll tools like SalaryBox, the salary and leave calculations can be generated instantly, leaving more time for clearance formalities. |
HR Compliance Checklist: 15 Steps for Error-Free F&F
Use this checklist for every employee exit to ensure nothing is missed. Each step should be completed and signed off before the final settlement is processed.
1. Accept Resignation / Issue Termination Letter
Acknowledge the resignation in writing or issue a formal termination letter citing the reason and effective date.
2. Confirm Last Working Day (LWD)
Mutually agree on the last working day, considering the notice period requirement and any waiver.
3. Calculate Notice Period
Determine if the notice period is being served fully, partially, or being bought out. Calculate recovery or payout accordingly.
4. Initiate Exit Clearance from All Departments
Send clearance requests to IT, Administration, Finance, the Reporting Manager, and any other relevant department.
5. Collect Company Assets
Ensure the return of laptop, mobile phone, ID card, access card, keys, uniforms, vehicle, and any other company-issued property.
6. Revoke System Access
Deactivate email account, VPN access, software licences, cloud storage, internal tools, and physical access to premises.
7. Calculate Unpaid Salary (Pro-Rata)
Compute salary for days worked in the last month using the company’s standard divisor (26 or 30 days).
8. Calculate Leave Encashment
Pull the Earned Leave / Privilege Leave balance from the attendance system and calculate encashment. CL and SL are not encashable.
9. Check Gratuity Eligibility
Verify if the employee has completed 5 years of continuous service (or is a fixed-term employee eligible for pro-rata gratuity).
10. Calculate Pro-Rata Bonus
Compute the bonus for the portion of the financial year the employee has worked, subject to the Payment of Bonus Act criteria.
11. Check for Outstanding Loans and Advances
Verify the loan and advance ledger. Any pending balance is deducted from the F&F amount.
12. Check for Pending Reimbursement Claims
Process any approved but unpaid reimbursements (travel, medical, mobile, etc.).
13. Compute TDS on F&F Components
Calculate income tax on taxable components, considering exemptions for gratuity, leave encashment, and retrenchment compensation.
14. Process Payment Within 2 Working Days
Transfer the net F&F amount to the employee’s bank account within the legal deadline.
15. Issue Exit Documents
Provide the relieving letter, experience certificate, Form 16 (Part B), F&F statement, and no-dues certificate.
Documents to Issue on Employee Exit
Every departing employee is entitled to receive the following documents. Issuing these promptly is both a legal requirement and professional courtesy.
| Document | When to Issue | Purpose |
| Relieving Letter | On last working day | Confirms employment ended; needed by new employer |
| Experience Certificate | On last working day | States role, tenure, and conduct for future reference |
| Form 16 / Part B | Within 15 days of LWD or by June | Tax deduction certificate for ITR filing |
| F&F Settlement Statement | With F&F payment | Detailed breakup of all payable and deductions |
| No-Dues Certificate | After clearance | Confirms no outstanding dues from either side |
| PF Transfer / Withdrawal Form | Employee-initiated (UAN) | Transfer PF to new employer or withdraw; done via EPFO portal |
| Gratuity Form F (Nomination) | At time of gratuity payment | Acknowledges gratuity receipt |
How SalaryBox Simplifies F&F Settlement
Processing F&F manually — using spreadsheets, chasing department clearances via email, computing pro-rata salary and leave encashment by hand — is time-consuming and error-prone. A single miscalculation can lead to employee disputes or compliance penalties.
| SalaryBox: Payroll Built for Indian Businesses SalaryBox automates the most time-intensive parts of F&F processing: ✓ Automatic pro-rata salary calculation based on attendance data ✓ Real-time leave balance tracking with instant encashment computation ✓ Loan and advance ledger with automatic F&F deduction ✓ TDS-compliant payslip generation with all statutory deductions ✓ One-click salary disbursement directly to employee bank accounts ✓ WhatsApp payslip delivery for instant employee communication |
Frequently Asked Questions (FAQ)
Q: What is full and final settlement?
A: Full and Final Settlement (F&F) is the process of calculating and paying all financial dues between an employer and a departing employee. It includes payable amounts (unpaid salary, leave encashment, gratuity, bonus) minus recoverable deductions (notice recovery, loans, TDS). The process is triggered whenever employment ends, regardless of the reason.
Q: Within how many days must F&F be settled under the new law?
A: Under Section 17(2) of the Code on Wages 2019 (effective 21 November 2025), all wage-related F&F components must be paid within 2 working days of the employee’s last working day. Gratuity has a separate 30-day timeline under the Payment of Gratuity Act.
Q: What components are included in the F&F settlement?
A: Payable components include: unpaid pro-rata salary, leave encashment (earned leave only), gratuity (if eligible), pro-rata bonus, retrenchment compensation (if retrenched), notice period pay (if employer terminates without notice), pending reimbursements, and earned incentives or commissions. Deductions include: notice period recovery, outstanding loans, training bond recovery, excess leave taken, unreturned assets, TDS, and professional tax.
Q: How is leave encashment calculated in F&F?
A: Leave Encashment = (Basic Salary + DA) ÷ 30 × Number of Unused Earned Leave Days. Only Earned Leave (EL) or Privilege Leave (PL) is encashable. Casual leave and sick leave lapse and cannot be encashed. The encashment amount is tax-exempt up to ₹25 lakh (lifetime limit) under Section 10(10AA).
Q: Is gratuity part of F&F?
A: Yes, gratuity is part of the overall F&F settlement, but it has a separate payment timeline. While other F&F components must be paid within 2 working days, gratuity must be paid within 30 days under the Payment of Gratuity Act. Gratuity is payable after 5 years of continuous service for permanent employees. Fixed-term employees receive pro-rata gratuity without the 5-year minimum under the new Labour Codes.
Q: What happens if the employer delays F&F beyond 2 working days?
A: The employer faces a fine of up to ₹50,000 for the first offence and up to ₹1,00,000 for repeat violations within 5 years. For gratuity specifically, if payment is delayed beyond 30 days, the employer must pay simple interest at 10% per annum from the date it became due.
Q: Can the employer deduct notice period from F&F?
A: Yes. If the employee does not serve the full notice period (as per the employment contract), the employer can deduct the salary for the unserved notice days from the F&F amount. This is typically calculated on Basic Salary, though some companies calculate it on Gross Salary. The employer can also choose to waive this deduction partially or fully.
Q: Is TDS applicable on the F&F amount?
A: Yes, TDS must be deducted on taxable F&F components at the employee’s applicable income tax slab rate. However, certain components have specific exemptions: gratuity is exempt up to ₹20 lakh, leave encashment up to ₹25 lakh, and retrenchment compensation up to ₹5 lakh. Unpaid salary, bonus, notice pay, and incentives are fully taxable.
Q: What if an employee absconds without giving notice?
A: The employer must send three written notices (via registered post) over 30–45 days. If the employee does not respond, services are terminated formally. F&F is calculated normally but includes full notice period recovery as a deduction. The F&F amount is typically held for 45–60 days. If company assets are not returned, their depreciated value is also deducted.
Q: How is F&F calculated for a retrenched employee?
A: In addition to standard components (unpaid salary, leave encashment, gratuity), a retrenched employee receives: (a) Retrenchment Compensation = 15 days’ average pay × years of completed service, and (b) Notice Period Pay = one month’s salary (since the employer initiated the exit). These additional payouts make the retrenchment F&F significantly higher than a resignation F&F.
Q: Can training bond amount be deducted from F&F?
A: It depends. If the employee signed a service bond linked to specialised training, the pro-rated training cost may be deducted. However, Indian courts have taken a mixed view — the bond amount must be reasonable, proportionate to actual training costs, and must not function as a restraint on the employee’s right to employment. Unreasonable bond clauses are frequently struck down by courts.
Q: Who gets the F&F if the employee dies during service?
A: All F&F dues are paid to the employee’s nominee (as declared in PF and gratuity nomination forms) or legal heir (if no nominee is on record). In the case of death, gratuity is payable even if the employee had not completed 5 years of service. The employer must also settle any unpaid salary, leave encashment, pending reimbursements, and insurance proceeds.
