What is Full and Final (FnF) Settlement?
F&F Settlement entails the clearance of all dues between an employer and an exiting employee. Full & Final Settlement includes all the amounts that the company needs to pay the employee pending salary, leave encashment, gratuity, bonus, and reimbursements, from which all dues owed by the employee, such as notice period, loan repayment, or return of company property, should be deducted.
The procedure is followed in any mode of exit, whether it is resignation, termination, retrenchment, retirement, or closure of the organization. Our FnF Calculator takes care of each element under the present statutes.
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FnF Settlement Timeline: The 2-Day Rule
Under Section 17(2) of the Code on Wages, 2019 - in force since the Labour Codes took effect on 21 November 2025, employers must pay all wage dues within two working days of the employee's last working day. This applies to resignation, termination, retrenchment, and closure alike.
Two components follow separate statutory clocks:
- Gratuity:30 daysunder the Payment of Gratuity Act, 1972. Delayed gratuity attracts interest.
- EPF withdrawal/transfer: processed by EPFO, typically 15–20 working days after claim submission.
If your final settlement is delayed beyond these windows without written justification, the employee can file a claim with the Labour Commissioner.
What's Included in an Employee Full and Final Settlement
Payables (dues to the employee)
Component | How it's calculated |
Pending salary | (Gross monthly salary ÷ paydays) × days worked in the final month, plus any unpaid arrears |
Leave encashment | (Basic + DA ÷ paydays) × unused earned leave days. Casual and sick leave are generally not encashable |
Gratuity | (Basic + DA) × 15 × completed years of service ÷ 26 — payable after 5 years of continuous service (courts have upheld eligibility at 4 years + 240 days) |
Bonus and incentives | Any declared but unpaid bonus, pro-rata variable pay per policy |
Reimbursements | Pending expense claims, unclaimed LTA (if policy permits encashment) |
Notice pay (employer side) | If the employer terminates without serving full notice, they pay salary for the shortfall |
Deductions (dues recoverable from the employee)
Deduction | How it's calculated |
Notice period recovery | Daily gross salary × unserved notice days. Example: 30-day notice, 15 served - 15 days' salary is recovered |
Outstanding loans/advances | Full pending balance from salary advances or company loans |
Asset recovery | Repair or replacement cost of damaged/unreturned company assets (laptop, ID, SIM) |
Statutory deductions | TDS on taxable components, professional tax, EPF/ESI for the final payroll period |
Full & Final Settlement Formula
FnF Amount = (Pending Salary + Leave Encashment + Gratuity + Bonus + Reimbursements) − (Notice Recovery + Loans + Asset Recovery + TDS and Statutory Deductions)
Worked Example
Priya resigns from a Gurugram-based company. Gross salary ₹80,000/month, basic ₹32,000, 6 years of service, 20 days of earned leave, 25 of 26 paydays worked in her last month, full notice served, ₹10,000 incentive due.
Component | Calculation | Amount |
Pending salary | (80,000 ÷ 26) × 25 | ₹76,923 |
Leave encashment | (32,000 ÷ 26) × 20 | ₹24,615 |
Gratuity | (32,000 ÷ 26) × 15 × 6 | ₹1,10,769 |
Incentive | As declared | ₹10,000 |
Gross FnF | Sum of payables | ₹2,22,307 |
Less: TDS and statutory deductions | Per applicable slab on taxable components | As computed |
Note: Gratuity and leave encashment enjoy tax exemptions (see tax section below), so the taxable portion is far smaller than the gross FnF.
How to Use the FnF Calculator
- Enter salary details: monthly gross, basic + DA, and paydays in a month (26 or 30, per your payroll policy).
- Add service dates: date of joining and last working day. The calculator derives gratuity eligibility andcompletedyears automatically.
- Enter leave balance: unused earned leave days as per your leave ledger.
- Set notice status: fully served, partially served, or not served. The tool computes recovery for the shortfall.
- Add extras: bonuses, reimbursements, loans, or advances.
- Get the breakdown: an itemized final settlement statement -every payable,every deduction, net amount.
Tax Treatment of F&F Settlement Components
Component | Tax treatment |
Pending salary & bonus | Fully taxable as salary income; TDS under Section 192 |
Leave encashment | Exempt up to ₹25 lakh (lifetime aggregate) under Section 10(10AA) for non-government employees at retirement/resignation |
Gratuity | Exempt up to ₹20 lakh (lifetime aggregate) under Section 10(10) for non-government employees |
Notice pay recovery | Deducted from gross; tax treatment depends on employer policy and applicable rulings |
Reimbursements | Non-taxable if supported by bills; unclaimed FBP/LTA paid out is taxable |
The employer must compute TDS on the full year's income, including the FnF month, before releasing the final settlement, not at year-end. Exact liability depends on the employee's total income and chosen tax regime; consult your Form 16 or a CA for precise figures.
Clearances Required Before FnF Settlement
- HR clearance: notice period verification, exit interview, and offboarding documentation.
- IT clearance: return of laptop, phone, SIM, and access credentials. Damage costs are recoverable from theFnFamount.
- Admin clearance: ID cards, access cards, keys, parking passes.
- Finance clearance: loan balances, advances, pending reimbursements, arrears.
Employee Checklist: Verify Before You Sign
- Joining date and last working day are recorded correctly, both drive gratuity and pro-ratamaths.
- Leave balance matches yourleaveledger.
- Gratuity is included ifyou'veserved 5+ years (or 4 years + 240 days).
- Notice recovery, if deducted, uses gross salary - not CTC - and the correct shortfall days.
- Every deduction has a written justification on the settlement sheet.
- You receive the relieving letter, finalpayslip, settlement statement, and Form 16.
What If Your Final Settlement Isn't Paid?
Send a written demand to HR citing the 2-working-day requirement under the Code on Wages. If unresolved, file a claim with the Labour Commissioner or pursue recovery under the Code. Delayed gratuity separately attracts interest under the Payment of Gratuity Act. Most disputes settle at the written-demand stage; keep every communication documented.
