You finally cleared the resignation letter. The exit interview went well. Two weeks later, the ex-employee is on your WhatsApp every other day asking when their FnF will hit their bank — and finance still hasn’t shared the working sheet. If that sounds like your last quarter, you are not alone. Full and final settlement is the part of the employee lifecycle where most Indian SMEs slip up — not because the rules are complicated, but because nobody owns the timeline.

And from 21 November 2025, the timeline has changed. The Code on Wages, 2019 is now in force, and Section 17(2) caps the FnF clock at two working days. The 30 to 45 day cushion most of us got used to is gone. Here is how to run a clean FnF cycle in 2026.

TL;DR — Quick answer

Full and final settlement (FnF) is the closing payroll calculation when an employee exits — pending salary, leave encashment, gratuity, bonus and any recoveries.
The new statutory limit under the Code on Wages, 2019 (notified 21 Nov 2025) is 2 working days from resignation, dismissal or retrenchment.
Standard FnF components: pending salary, earned-leave encashment, gratuity (if 4+ years), statutory bonus, reimbursements, less notice-period recovery, advances and TDS.
Most-missed steps for HR: marking the PF EXIT date on EPFO, applying the ₹25 lakh leave-encashment exemption, and issuing Form 16 (Part B) to ex-employees by 15 June.

What is full and final settlement?

Full and final settlement is the closing financial transaction between an employer and an exiting employee. In one line — it is the last salary, plus everything owed, minus everything owed back, paid through one final settlement note before the employee is taken off your active payroll.

It applies to every kind of exit — resignation, termination, retrenchment, retirement, abandonment, end of fixed-term contract, even death-in-service (where dues go to the registered nominee). The components stay the same. Only the tax treatment and the timeline shift.

The 8 components of an FnF in India

Every Indian HR manager should be able to draft an FnF working sheet that looks like this:

Unpaid salary for days worked in the exit month
Earned/privilege leave encashment (as per company policy and state rules)
Gratuity (if continuous service is at least 4 years 240 days under the Payment of Gratuity Act, 1972)
Statutory bonus pro-rata (if the employee qualifies — basic + DA up to ₹21,000)
Reimbursements pending (LTA, mobile, fuel, medical bills)
Variable pay or incentives accrued and approved
Less: notice-period shortfall recovery, advances, loan EMIs, asset non-return charges, training bond
Less: TDS on the net taxable amount

Hand the employee a single, signed statement with each line item and the net amount payable. That one document avoids 90% of post-exit disputes.

The 2-day rule under the Code on Wages, 2019

Section 17(2) of the Code on Wages, 2019 reads — where an employee has been removed, dismissed, retrenched or has resigned, the wages payable shall be paid within two working days of such removal, dismissal, retrenchment or resignation.

The four labour codes were notified by the Central Government with effect from 21 November 2025. State-level rules are rolling out in phases through 2026. Even where your state is still finalising its rules, the central law is enforceable and labour officers have started enquiring on it.

What this means for your team: – The FnF working sheet must be ready before the last working day, not started after it. – Notice-period planning becomes a must during the resignation acceptance, not at exit. – Manual Excel sheets and 3 to 4 sign-offs across HR, payroll and finance simply cannot fit into 2 working days. You need a single workflow.

The FnF timeline that actually works in 2026

Stage	Timeline	Owner	What gets done
Day -30	Resignation accepted	Reporting manager + HR	Acknowledge in writing, lock notice end date
Day -15 to 0	Knowledge transfer	Manager	KT document, reassignment, project sign-off
Day -7	Pre-FnF computation	Payroll	Draft leave, gratuity, bonus, recoveries — circulate for approval
Day -3	Asset and access checklist	HR + IT	Laptop, ID card, dongle, vehicle return scheduled
Day 0 (LWD)	Last working day	HR + IT	Disable email, VPN, Slack, HRMS access; signed exit form collected
Day +1	Final FnF sheet locked	Payroll + Finance	Net amount approved, payout file generated
Day +2	FnF credited	Bank + HR	Amount in bank, statement and relieving letter sent
Day +7 to +15	Compliance closeout	HR	PF EXIT date marked on EPFO Unified Portal, ESI exit, experience letter
FY-end	Form 16 issued	Payroll	Part A and Part B by 15 June of next FY

The big mindset change — your FnF is no longer a post-exit task. It is a pre-exit task with a 2-day post-exit close-out. Build the workflow backwards from Day +2.

TDS on FnF — the part most HR teams get wrong

FnF income is taxable in the financial year of receipt under the head Salaries. Three sub-rules to remember:

Leave encashment at retirement or resignation is exempt under Section 10(10AA) up to ₹25 lakh in a lifetime for non-government employees, per CBDT Notification 31/2023 dated 24 May 2023 (effective 1 April 2023). For Central and State government employees, the exemption is full.
Gratuity is exempt under Section 10(10) up to ₹20 lakh, lifetime.
Notice-period recovery is netted off from gross salary, not a separate income head. CBIC Circular 178/10/2022-GST dated 3 August 2022 also clarified that no GST applies on notice-pay recovery — it is a contractual deterrent, not a service.

Once exemptions are applied, deduct TDS on the balance at the employee’s chosen tax-regime slab. Issue Form 16 (with the new Part B for FY 2025-26) along with the FY-end TDS statement, by 15 June of the following year — even for ex-employees.

What HR managers get wrong about FnF

After watching FnF runs across hundreds of Indian SMEs, these are the six errors that keep showing up.

Missing the PF EXIT date on the EPFO Unified Portal. Without it, the employee cannot claim their PF or transfer the UAN — and they will call you for the next two years.
Calculating gratuity on gross instead of basic + DA. The Payment of Gratuity Act formula is (Last drawn basic + DA × 15 ÷ 26) × completed years of service. Using gross inflates the payout and the TDS — both wrong.
Treating leave encashment as fully taxable when the ₹25 lakh exemption applies. Most resignations qualify under Section 10(10AA). Check the lifetime limit before defaulting to taxable.
Recovering notice period at CTC instead of basic + DA. Recovery is at basic + DA per day, not gross and not CTC. Many HR teams over-recover and then face a labour officer notice later.
Disabling system access after FnF instead of on the LWD. A retained corporate Gmail account on Day 7 after exit is an information-security incident waiting to happen.
Holding the relieving letter as leverage. This is technically not enforceable in most Indian states. The relieving letter must be issued once dues are settled — it is not a negotiation tool, and Glassdoor reviews will remember.

Quick checklist — Run a clean 2-day FnF

Print this and stick it on your payroll team’s wall.

FAQ — Full and final settlement in India 2026

Q1. What is the legal time limit for FnF in India in 2026? Two working days from the last working day, under Section 17(2) of the Code on Wages, 2019. The Code was notified on 21 November 2025 and applies across India for resignations, dismissals and retrenchments. The earlier 30 to 45 day industry norm is no longer compliant.

Q2. Can an employer withhold FnF if assets are not returned? You can adjust the depreciated value of unreturned assets against the FnF amount, provided your appointment letter or asset policy clearly authorises it. You cannot withhold the entire FnF indefinitely — that risks a complaint to the labour commissioner and breaches the 2-day Code on Wages rule.

Q3. Is leave encashment in FnF taxable? Up to ₹25 lakh of leave encashment received on resignation or retirement is exempt under Section 10(10AA) for non-government employees, per CBDT Notification 31/2023. Anything above the lifetime cap is taxable as Salary. Government employees enjoy a full exemption with no monetary ceiling.

Q4. What is the difference between FnF and gratuity? Gratuity is one component within FnF. FnF is the full closing settlement — pending salary, leave encashment, gratuity, bonus, reimbursements, minus recoveries and TDS. Gratuity alone is the long-service payment under the Payment of Gratuity Act, 1972, payable after 4 years 240 days of continuous service.

Q5. Can HR recover the notice period from FnF? Yes, if the employee has not served the full notice stated in the appointment letter. Recovery is at basic + DA per day of shortfall — not at gross, not at CTC. Show it as a deduction line in the FnF statement. As per CBIC Circular 178/10/2022-GST, no GST applies on the recovery.

Q6. When should Form 16 be issued for an exiting employee? Form 16 is issued for the financial year, not the exit month. Issue Form 16 (Part A and Part B) for the FY in which the employee exited, by 15 June of the following financial year. Do not delay it because the employee has left — it is the ex-employee’s primary proof for filing their ITR.

The cleanest way to run FnF in 2026

If you are still calculating FnF in Excel — leave balance from one sheet, gratuity from another, asset recovery in a WhatsApp message — you cannot meet a 2-day window. A modern HRMS pulls all eight FnF components into one workflow, runs the math, generates the statement, marks PF and ESI exit, and triggers the relieving letter. Your team gets back hours every cycle and your exits stay clean.

EZHRM’s Payroll Software and Statutory Compliance Module handle the full FnF cycle in a single screen — from notice acceptance to PF EXIT marking — built for the new 2-day rule. Worth a 20-minute look.

Sources: Code on Wages, 2019 — India Code, CBDT Notification 31/2023 on Section 10(10AA), CBIC Circular 178/10/2022-GST, EPFO Unified Portal, Income Tax Department — Form 16.