Full and Final Settlement in India: Process and Timeline
What goes into a full and final settlement, the two-working-day rule under the Code on Wages, the documents to hand over, and a worked example with numbers.
Short answer: a full and final (F&F) settlement is the last payment to an employee who leaves: unpaid salary up to the last working day, encashment of unused leave, gratuity if they qualify, bonus and reimbursements due, minus recoveries such as notice shortfall, advances, PF and tax. Under the Code on Wages, 2019, in force since 21 November 2025, the wages due must be paid within two working days of the employee's removal, dismissal, retrenchment or resignation. Gratuity and some other items follow their own rules.
What changed with the labour codes
The old Payment of Wages Act set a two-day limit only when the employer ended the job. Section 17(2) of the Code on Wages extends it to an employee who resigns, which is how most people leave. Many companies still run a 30 to 45-day F&F cycle out of habit. That cycle now needs a hard look.
Two points are still being argued by lawyers. First, whether the two days cover every item on the settlement sheet or only "wages" as the Code defines them (basic pay, dearness allowance and retaining allowance, with some allowances added back). Second, whether the clock starts on the last working day. The safe reading is: pay the salary and leave encashment within two working days of the last working day, and settle the rest as fast as your process allows. The appropriate government can set a different time limit under section 17(3), so check whether your state has done so.
During the transition, states are still finalising their rules, and the provisions of the older Acts continue where the new rules are not yet in place. Your CA or labour consultant will know your state's position.
The components of an F&F settlement
What the employee receives
- Salary for days worked in the final month, up to the last working day.
- Leave encashment for unused earned leave. The OSH Code requires wages in lieu of accrued leave to be paid before the second working day after the worker quits or is discharged.
- Gratuity, if eligible: generally five years of continuous service for permanent employees, and one year (pro rata) for fixed-term employees under the Code on Social Security. The formula is in our gratuity calculation guide.
- Statutory or performance bonus due for the part of the year worked.
- Pending reimbursements such as travel or phone bills already approved.
What is deducted
- Notice period shortfall, if the appointment letter allows recovery and the employer did not waive it.
- Outstanding advances or loans.
- Employee PF (and ESI, if applicable) on the final month's wages.
- TDS on salary, recomputed for the year with the settlement included.
- Professional tax, where your state levies it.
A worked example
Ravi earns ₹60,000 a month: basic ₹30,000, HRA ₹12,000 and a special allowance of ₹18,000. He joined on 1 March 2021 and his last working day is 18 June 2026. His notice period is 60 days; he served 45. He has 10 days of earned leave left and an unpaid salary advance of ₹5,000. The company's policy divides monthly pay by 30 days.
| Item | How it is worked out | Amount (₹) |
|---|---|---|
| Salary, 1–18 June | 60,000 × 18 ÷ 30 | 36,000 |
| Leave encashment | 30,000 ÷ 30 × 10 days (policy pays on basic) | 10,000 |
| Gratuity | 30,000 × 15 ÷ 26 × 5 completed years | 86,538 |
| Approved reimbursements | Travel bills | 2,400 |
| Total earnings | 1,34,938 | |
| Employee PF | 12% of basic for 18 days (12% × 18,000) | (2,160) |
| Notice shortfall | 15 days of basic, as the appointment letter states | (15,000) |
| Salary advance | Outstanding balance | (5,000) |
| TDS on salary | Assumed figure; depends on the year's income and regime | (4,000) |
| Net payable | 1,08,778 |
Two checks hide in this example. The gratuity uses five completed years because the extra three months are under six. And it uses basic pay only because Ravi's excluded allowances (HRA and special allowance, ₹30,000) are not more than half his total pay. Under the Code's definition of wages, any excess over half is added back to wages, which would raise the gratuity and the leave encashment. Divisors and the base for leave encashment are policy choices; whatever you use, write it into the appointment letter and use it consistently.
The timeline that works
- On resignation: confirm the last working day in writing, and whether any notice shortfall will be recovered or waived.
- Two weeks before the last day: collect clearances from IT, finance and the reporting manager — laptop, ID card, access, open advances.
- Last working day: freeze attendance and leave, and prepare the settlement sheet.
- Within two working days: pay salary and leave encashment, with a settlement statement.
- Next: pay gratuity under its own process, update the employee's exit date with EPFO so their PF can be transferred or withdrawn, and issue the relieving and experience letters.
- After year end: issue the annual TDS certificate on salary.
Documents to hand over
- F&F statement showing every earning and deduction, as in the table above.
- Payslip for the final month.
- Relieving letter and experience letter.
- Gratuity calculation, if paid.
- TDS certificate for salary, when it falls due.
Most F&F disputes are not about the law; they are about a number the employee cannot trace. A one-page statement with the working, like the table above, prevents most of them. If you are unsure how the final month's salary itself is built up, see how salary is calculated in India.
Where Grovia fits
Grovia does not have a separate full-and-final module and does not calculate gratuity or leave encashment for you. What it does hold: each employee's joining date and last working day, their leave requests and approvals, and a monthly payroll entry with basic, HRA, other allowances, bonus, PF, ESI, TDS and other deductions. You can record the final month as a payroll entry, adding the settlement items you have worked out, and print or save the payslip as a PDF from the HR module.
Figures checked on 1 November 2026. Tax and labour rules change, and several states are still finalising their rules under the labour codes; confirm the current position with your CA before you act on it.
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Frequently Asked Questions
What is the time limit for full and final settlement in India?
Under section 17(2) of the Code on Wages, wages due to an employee who resigns, is removed, dismissed or retrenched must be paid within two working days. Gratuity follows its own rules under the Code on Social Security.
Can an employer hold the F&F until the notice period is served?
The settlement falls due when employment ends. If the employee leaves early, the shortfall can be recovered only if the appointment letter allows it, and it should be shown on the settlement statement.
Is leave encashment part of the full and final settlement?
Yes. Unused earned leave is paid out when employment ends, and the OSH Code requires it before the second working day after the worker quits or is discharged.
Is gratuity paid in the full and final settlement?
It is usually shown on the same statement, but only employees who meet the service condition are eligible: generally five years, or one year for fixed-term employees.
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