Ravi from your Bahadurgarh unit walks into your cabin at 4 pm, hands in his laptop, and says his last working day is today — he’s already served his notice period at his old job’s short-staffed replacement. Now you have exactly two working days to hand him a clean, correct full and final settlement, or your company is looking at a penalty under the Code on Wages. If your F&F process still runs on a dusty Excel sheet passed between HR and finance, this is the week that breaks it.
A full and final settlement calculator is the fastest way to get this right — it adds up pro-rated salary, leave encashment, gratuity, bonus and notice recovery in one shot, instead of you juggling five formulas under a deadline. Here’s everything an Indian HR manager needs to know about F&F in 2026, including the new payment deadline nobody warned you about.
TL;DR — F&F Settlement in 60 Seconds
- Since 21 November 2025, wages in a full and final settlement must be paid within 2 working days of the employee’s last day under Section 17(2) of the Code on Wages, 2019 — not the old 30–45 day norm.
- F&F = Pro-rated salary + Leave encashment + Gratuity (if eligible) + Bonus − Notice period recovery − Other deductions.
- Gratuity is tax-exempt up to ₹20 lakh; leave encashment for private-sector employees is exempt up to ₹25 lakh (lifetime limit across employers).
- Missing the 2-day deadline can now cost you up to ₹50,000 per offence under Section 54 — use a free F&F settlement calculator to avoid manual errors that delay payout.
What Is Full & Final Settlement?
Full and final (F&F) settlement is the complete clearing of dues between an employer and an employee when the employment relationship ends — through resignation, termination, retrenchment, or retirement. It bundles every rupee owed to the employee (salary, leave, gratuity, bonus) minus every rupee owed to the company (notice shortfall, asset recovery, loan balances) into one final payout, along with the relieving letter, Form 16, and PF transfer documents.
For years, Indian companies treated 30–45 days as “standard practice” for F&F. That window has now shrunk dramatically, and most payroll teams haven’t caught up.
The 2-Day Rule: What Actually Changed in 2026
On 21 November 2025, India notified four consolidated Labour Codes, folding 29 older labour laws — including the Payment of Wages Act and the Payment of Bonus Act — into the Code on Wages, 2019, the Industrial Relations Code, the Code on Social Security, and the Occupational Safety Code. Section 17(2) of the Code on Wages is the one that should worry your payroll calendar most.
It states that wages payable to an employee who is removed, dismissed, retrenched, or who resigns must be paid within two working days of that exit — regardless of designation, salary band, or industry. Enforcement has tightened through 2026, and a delayed settlement can now draw a fine of up to ₹50,000 for a first offence under Section 54, with escalating penalties for repeat lapses and possible interest on the delayed amount.
What the 2-Day Rule Covers — and What It Doesn’t
This is where most HR teams trip up. The 2-day clock applies to wages — salary, allowances, and most variable pay. It does not override the separate statutory timeline for gratuity, which still has its own 30-day window under the Payment of Gratuity Act, 1972. In practice, this means you’ll often issue two payouts: the wage component within 2 working days, and gratuity (if applicable) within 30 days, unless your company policy pays both together for a cleaner exit experience.
F&F Settlement Formula & Components
Here’s the exact breakup our full and final settlement calculator runs behind the scenes:
| Component | Formula | Notes |
|---|---|---|
| Pro-rated Salary | (Gross Salary ÷ 26) × Days Worked | Fully taxable |
| Leave Encashment | (Basic ÷ 26) × Pending Earned Leaves | Exempt up to ₹25 lakh (private sector, lifetime) |
| Gratuity (≥5 yrs service) | (Basic + DA) × 15 ÷ 26 × Years of Service | Exempt up to ₹20 lakh |
| Bonus / Incentive | As per Payment of Bonus Act or company policy | Fully taxable |
| Notice Period Recovery | (Gross ÷ 30) × Shortfall Days | Deducted, not taxable (it’s a recovery) |
| Other Deductions | Loans, asset recovery, excess leave availed | Company-specific |
Net F&F = Pro-rated Salary + Leave Encashment + Gratuity + Bonus − Notice Recovery − Other Deductions.
A Worked Example
Take a senior employee with ₹80,000 monthly gross, 6 years of service, who worked 25 out of 30 days in their exit month and has 20 earned leaves pending. Basic is assumed at 40% of gross (₹32,000).
- Pro-rated salary: (80,000 ÷ 26) × 25 = ₹76,923
- Leave encashment: (32,000 ÷ 26) × 20 = ₹24,615
- Gratuity: 32,000 × 15 ÷ 26 × 6 = ₹110,769
- Net F&F (before bonus/deductions): approximately ₹95,769 after other adjustments per company policy.
Run your own numbers on the F&F settlement calculator instead of doing this by hand every time someone resigns — it takes the guesswork (and the arithmetic errors) out of a process you now have 48 hours to complete.
TDS on Full & Final Settlement
This is the section HR managers get the most emails about. Here’s the honest breakdown:
- Pro-rated salary and notice pay recovery — fully taxable as salary income, taxed at the employee’s slab rate in the relevant financial year.
- Gratuity — exempt up to ₹20 lakh under Section 10(10) of the Income Tax Act; any excess is taxable.
- Leave encashment — exempt up to ₹25 lakh for private-sector employees under Section 10(10AA), calculated as the lowest of: actual amount received, 10 months’ average salary, cash equivalent of unutilised leave (capped at 30 days per year of service), or ₹25 lakh. This is a lifetime ceiling across all employers, not per job change.
- Bonus — fully taxable as salary income in the year of receipt.
Whatever is taxable gets added to the employee’s Form 16 for that financial year, so your payroll and TDS filing (Form 24Q) need to reflect the F&F components correctly — not just the exit month’s regular salary.
F&F Checklist: What HR Needs to Complete in 2 Working Days
- Confirm last working day and notice period shortfall (if any) the moment resignation is accepted.
- Pull attendance, pending leave balance, and any outstanding advances or loans from your HRMS.
- Calculate pro-rated salary, leave encashment, bonus due, and notice recovery using a full and final settlement calculator to avoid manual formula errors under time pressure.
- Check gratuity eligibility separately — it follows its own 30-day timeline, not the 2-day wage rule.
- Get IT and admin sign-off on asset return (laptop, ID card, SIM) before releasing the final amount.
- Process payment, issue the relieving letter, experience letter, and F&F statement together.
- Update PF/ESI exit records and reflect the payout correctly in the next Form 24Q filing.
What HR Managers Get Wrong
Even experienced HR teams stumble on the same handful of things:
- Treating gratuity and wages as one deadline. They’re not — wages need 2 working days, gratuity has 30.
- Using 30 days instead of 26 as the divisor. Most Indian payroll practice uses 26 working days a month for pro-ration; using 30 understates what’s owed.
- Forgetting the lifetime cap on leave encashment exemption. An employee who already claimed part of the ₹25 lakh exemption at a previous employer has less headroom left, and payroll needs a declaration to apply this correctly.
- Not documenting notice period waivers in writing. Verbal “it’s fine, don’t serve notice” approvals cause disputes later when recovery shows up on the payslip.
- Delaying F&F because of a pending exit interview or asset return. Under the new timeline, this excuse no longer holds up — asset recovery has to run parallel to, not before, the settlement calculation.
How EZHRM Simplifies F&F Settlements
Manually calculating F&F for every exit — while also tracking the 2-day statutory clock — is exactly the kind of task that breaks down at scale. EZHRM’s payroll software pulls attendance, leave balances, and salary structure automatically at the time of exit, so your team isn’t reconstructing numbers from scratch under a 48-hour deadline. Combined with EZHRM’s compliance management tools, you get built-in tracking for gratuity and TDS timelines too, so nothing slips between the wage payout and the gratuity payout.
Frequently Asked Questions
What is the new deadline for full and final settlement in India?
Since 21 November 2025, wages owed at exit must be paid within 2 working days under Section 17(2) of the Code on Wages, 2019. This applies to resignation, termination, and retrenchment across all salary levels and industries.
Is gratuity included in the 2-day F&F deadline?
No. Gratuity follows its own 30-day timeline under the Payment of Gratuity Act, 1972. Only wage components — salary, allowances, and notice recovery adjustments — fall under the 2-working-day rule.
How is notice period recovery calculated in F&F?
Notice recovery = (Gross Salary ÷ 30) × Shortfall Days. If an employee doesn’t serve their full notice period, this amount is deducted from their final settlement, unless the employer formally waives it.
Is full and final settlement taxable?
Partly. Pro-rated salary, notice recovery adjustments, and bonus are fully taxable as salary income. Gratuity is exempt up to ₹20 lakh and leave encashment up to ₹25 lakh (lifetime, private sector) — amounts above these limits are taxed at slab rate.
What happens if an employer misses the 2-day F&F deadline?
Delayed payment can attract a fine of up to ₹50,000 under Section 54 of the Code on Wages for a first offence, with higher penalties for repeat non-compliance, plus potential interest on the overdue amount and labour court claims.
Can I calculate F&F settlement online for free?
Yes. EZHRM’s free full and final settlement calculator computes pro-rated salary, leave encashment, gratuity, bonus, and notice recovery instantly — no signup required.
Getting F&F Right, Every Time
The 2-day rule isn’t going away, and neither is the paperwork that comes with every resignation letter on your desk. Between gratuity exemptions, leave encashment caps, and notice recovery math, doing this by hand for even a handful of exits a month is where errors — and complaints to the Labour Commissioner — start. For more on the components that feed into F&F, check EZHRM’s gratuity calculator, leave encashment calculator, and notice period recovery calculator — or browse all our free HR calculators in one place. For more HR compliance reads like this one, visit the EZHRM blog.
If your team is still settling exits on spreadsheets under a 48-hour clock, it might be time to see how EZHRM’s F&F settlement calculator — and the payroll platform behind it — can take that pressure off.