Rekha from your finance team pings you on a Friday evening: “Suresh resigned last week, his last working day was yesterday, and payroll needs the F&F numbers by Monday morning.” You pull up his file — 4 years 7 months of service, 18 days of earned leave pending, a 30-day notice period he served for only 12 days, and a laptop EMI recovery still pending. Now what gets added, what gets deducted, and what gets taxed?
If that scenario feels familiar, you’re not alone. Full and final settlement is one of those payroll tasks that looks simple on paper — add what’s owed, subtract what’s due — until you actually sit down and do it for a real employee with a messy exit.
TL;DR
- Full & final settlement (F&F) = unpaid salary + leave encashment + gratuity (if eligible) + pro-rata bonus − deductions (notice shortfall, loans, asset recovery)
- Several states now require F&F to be paid within 2 working days of the last working day — not the old 30–45 day industry norm
- Gratuity up to ₹20 lakh and leave encashment up to ₹25 lakh (lifetime, across employers) are tax-exempt; almost everything else in F&F is regular salary income and attracts TDS
- A full & final settlement calculator nets all of this out automatically — doing it in Excel is where most errors creep in
What Is Full & Final Settlement, Really?
Full and final settlement, or F&F, is the complete financial closure between an employer and an employee when the employment relationship ends — through resignation, termination, retirement, or the end of a fixed-term contract. It is not just “last month’s salary.” It is every rupee the company owes the employee, and every rupee the employee owes back, netted into a single final payout (or, occasionally, a final recovery notice if deductions exceed dues).
Get any one component wrong — say, you tax a notice-pay recovery as if it were income, or you forget to prorate the annual bonus — and you’re looking at a labour complaint, an unhappy former employee leaving a review, or a TDS mismatch that shows up in the employee’s Form 26AS months later. A full & final settlement calculator exists precisely to stop that kind of leakage.
The Six Components That Make Up an F&F Payout
Every F&F, regardless of company size, is built from the same building blocks. What changes is which ones apply to a given employee.
| Component | What it covers | Who’s eligible |
|---|---|---|
| Unpaid salary & allowances | Days worked in the exit month, plus any pending reimbursements | Every exiting employee |
| Earned / privilege leave encashment | Unused earned leave converted to cash at the last drawn basic + DA | Employees with an encashable leave balance — see the leave encashment calculator |
| Gratuity | 15 days’ wages per completed year of service | Employees with 5+ years of continuous service — check the gratuity calculator |
| Pro-rata bonus | Statutory or performance bonus for the incomplete financial year | Employees drawing wages within the Payment of Bonus Act ceiling |
| Notice period pay or recovery | Pay for a waived notice period, or a deduction for a shortfall the employee didn’t serve | Depends on offer letter terms — see the notice period recovery calculator |
| Deductions | Loans, salary advances, asset non-return, excess leave availed | Only where documented and agreed in writing |
How Each Component Is Taxed — The Part Most Calculators Skip
This is where HR teams lose the most time, because F&F is not one lump sum for tax purposes — each component follows its own rule under the Income Tax Act.
| Component | Taxable? | Exemption / treatment |
|---|---|---|
| Unpaid salary, allowances, pro-rata bonus | Fully taxable | Taxed as salary income at the employee’s slab rate; normal TDS under Section 192 applies |
| Leave encashment on resignation/retirement | Exempt up to a limit | Exempt up to ₹25 lakh under Section 10(10AA) — a lifetime cap across all employers, not per job |
| Leave encashment during service | Fully taxable | No exemption applies; it’s treated as regular salary the moment it’s paid mid-employment |
| Gratuity | Exempt up to a limit | Exempt up to ₹20 lakh under Section 10(10) for employees covered by the Payment of Gratuity Act, 1972 |
| Notice pay received (company waives notice) | Fully taxable | Treated as salary income, TDS applies |
| Notice pay recovered (employee didn’t serve notice) | Not income | It’s a deduction from dues, not a payment — no TDS angle on the recovery itself |
One nuance worth flagging: the ₹20 lakh gratuity exemption and ₹25 lakh leave encashment exemption both remain available whether the employee is on the old regime or the new regime — they aren’t on the list of exemptions the new regime disallows. What the new regime does take away is things like HRA and LTA, which matter more for the CTC calculation than for F&F. If TDS on the taxable portion needs a slab check, FY 2026-27’s new regime slabs run nil up to ₹4 lakh, 5% up to ₹8 lakh, 10% up to ₹12 lakh, and climb from there — worth confirming against the employee’s Form 12BAA declaration before you finalise the TDS on their last payslip.
The 2-Day Deadline: Why the Old 30–45 Day Norm Doesn’t Fly Anymore
If your F&F process still runs on a “we’ll settle it in the next payroll cycle” assumption, it’s time to revisit that. Several state Shops & Establishments Acts have been amended to mandate settlement within 2 working days of the last working day for resignation, termination, retrenchment, or closure — Karnataka’s amended Act, which received Gazette notification in September 2026, is one of the strictest examples, and it applies regardless of the employee’s salary level or designation.
Two exceptions to keep in mind: gratuity still runs on its own 30-day statutory timeline under the Payment of Gratuity Act, and PF withdrawal follows EPFO’s separate claim-processing process — neither is bound by the 2-day state rule. But everything else — salary, leave encashment, bonus, notice pay netting — increasingly needs to be ready to disburse almost immediately after the last working day. That’s a real shift from the 30–45 day norm most Indian companies grew up with, and it’s worth checking your state’s specific Shops & Establishments Act rather than assuming a national standard, since state-wise compliance still varies meaningfully even under the new labour codes.
F&F Checklist: From Resignation Letter to Bank Transfer
- Confirm the last working day in writing and check it against the notice period clause in the offer letter.
- Freeze attendance and leave records for the exit month — this is your base for unpaid salary and leave balance.
- Calculate notice period shortfall or payout — did the employee serve full notice, part notice, or none at all?
- Compute leave encashment on the earned/privilege leave balance at last drawn basic + DA.
- Check gratuity eligibility — 5 years of continuous service, with the “240 days in the 5th year” rule for daily-wage and shift workers.
- Prorate the bonus for the incomplete financial year, if the employee is within the Payment of Bonus Act coverage.
- List every deduction — loan balances, advances, unreturned laptop or ID card, excess leave availed — with documentation the employee has already acknowledged.
- Apply TDS component-wise, not as one flat number, using the exemption limits above.
- Generate the F&F statement and relieving letter together, and route for payout within your state’s mandated window.
Running this manually in a spreadsheet for even a handful of exits a month is where the errors start. A full & final settlement calculator walks through each of these steps and gives you a clean, component-wise breakup you can hand straight to finance.
Where HR Managers Get F&F Wrong
- Taxing notice pay recovery as if it were income. It’s a deduction from what’s owed, not a payment — there’s nothing to apply TDS on.
- Forgetting the bonus proration. An employee who exits in month 9 of the financial year is still owed 9 months of statutory bonus, not zero.
- Treating gratuity and leave encashment as one taxable bucket. They have separate exemption sections, separate limits, and need to be shown separately on Form 16 Part B.
- Missing the state-specific settlement deadline. HR teams that built their SOP around a 30-day norm five years ago haven’t updated it for the 2-day rule now active in several states.
- Not documenting deductions before the exit interview. Recovering a laptop cost or loan balance without a signed acknowledgment invites disputes later.
Frequently Asked Questions
What is the full and final settlement (F&F) process in India?
F&F is the process of calculating and paying every due owed to an exiting employee — unpaid salary, leave encashment, gratuity, bonus, and notice pay — after netting off deductions like loans or notice shortfall. It closes the financial relationship between employer and employee at exit.
How is TDS calculated on full and final settlement?
TDS is calculated component-wise. Unpaid salary, bonus, and any notice pay received are fully taxable at the employee’s slab rate. Gratuity is exempt up to ₹20 lakh and leave encashment up to ₹25 lakh (lifetime); only amounts above these limits attract tax.
Is gratuity part of full and final settlement?
Yes, if the employee has completed 5 years of continuous service. Gratuity is calculated and included in the F&F statement, though the actual payout can follow the Payment of Gratuity Act’s separate 30-day timeline rather than the state’s 2-day F&F rule.
How many days does a company have to complete F&F settlement?
It depends on the state. Several states have amended their Shops & Establishments Acts to require settlement within 2 working days of the last working day, replacing the older 30–45 day industry practice. Always check your specific state’s rules rather than assuming a national standard.
Is notice period recovery taxable?
No. When an employee doesn’t serve the full notice period and the company recovers the shortfall from their dues, that recovery is a deduction, not income — there’s no TDS implication on the recovered amount itself.
Can leave encashment be fully tax-free in F&F?
Only up to the exemption limit. Leave encashment paid at resignation or retirement is exempt up to ₹25 lakh under Section 10(10AA), and this is a lifetime cap across all employers — not a fresh limit at every job change.
Getting every F&F component and its tax treatment right, every single time, is hard to do by hand once you’re processing more than a couple of exits a month. EZHRM’s full & final settlement calculator does the component-wise math for you — and if you want to see the rest of our free HR calculators or read more HR compliance guides, they’re all in one place.