It’s 6 PM on a Friday, and Priya from your accounts team just forwarded a resignation email from a sales executive who quit an hour ago, no notice served, and the CFO wants his full and final settlement cleared “before he starts making noise on LinkedIn.” If this sounds familiar, you’re not alone — since the four Labour Codes kicked in in November 2025, the old habit of taking 30-45 days to close an exit has turned from “slightly slow” into a wage offence with a fine attached.
This is exactly the kind of situation EZHRM’s free full and final settlement calculator was built for — punch in the numbers and get a defensible payout in minutes instead of a spreadsheet built from memory. But a calculator is only as good as the person who knows what to feed it, so let’s get into what actually goes into an F&F in 2026, and where most HR teams in India still trip up.
TL;DR — Full & Final Settlement in 2026
- Under Section 17(2) of the Code on Wages, 2019, wages on exit must be paid within 2 working days of resignation, termination, or retrenchment — not the old 30-45 day norm.
- Gratuity is not covered by the 2-day rule — it still has its own 30-day timeline under the Payment of Gratuity Act / Code on Social Security.
- Leave encashment is tax-free up to ₹25 lakh (lifetime, non-government employees); gratuity up to ₹20 lakh.
- Missing the 2-day deadline is a wage offence under Section 54 — up to ₹50,000 fine on the first slip, up to ₹1 lakh or 3 months’ imprisonment on a repeat.
What Is Full & Final Settlement, Exactly?
Full and final settlement (F&F) is the complete calculation and payment of everything owed to an employee when they exit — through resignation, termination, retrenchment, or end of contract. It nets out what the company owes the employee (unpaid salary, leave encashment, bonus, reimbursements, gratuity if eligible) against what the employee owes the company (notice period shortfall, loan balances, unreturned assets).
Get this wrong and you’re looking at TDS mismatches on Form 16, EPFO/ESIC compliance gaps, and — increasingly — a former employee who knows exactly which section of the Code on Wages you just violated.
The 2-Day Rule: What Actually Changed
India’s new labour codes came into force on 21 November 2025, and the single biggest change for F&F processing is the settlement timeline. Section 17(2) of the Code on Wages states that wages payable on removal, dismissal, retrenchment, or resignation must be paid within two working days. Compare that to the 30-45 day window most Indian companies had normalised, and you can see why this one clause has caused more payroll panic than anything else in the new codes.
What’s covered by the 2-day clock
Unpaid salary up to the last working day, earned leave encashment, pro-rata bonus, pending reimbursements, and overtime dues all fall inside the 2-working-day window.
What’s excluded
Gratuity keeps its separate 30-day payment timeline under the Payment of Gratuity Act (soon fully folded into the Code on Social Security), so don’t let your F&F sign-off get held up chasing a gratuity figure that has its own runway. If gratuity applies, run it separately on the gratuity calculator so the F&F itself isn’t delayed.
What Goes Into an F&F Calculation
Every F&F is really two columns — dues and deductions — netted against each other. Here’s the breakdown HR teams should be checking line by line:
| Component | Direction | Statutory Timeline | Taxable? |
|---|---|---|---|
| Unpaid salary (last working day) | Payable to employee | 2 working days | Yes, per slab |
| Earned leave encashment | Payable to employee | 2 working days | Exempt up to ₹25 lakh lifetime (Sec 10(10AA)) |
| Pro-rata statutory/festival bonus | Payable to employee | 2 working days | Yes, per slab |
| Gratuity (if 5+ years’ service) | Payable to employee | 30 days (separate) | Exempt up to ₹20 lakh |
| Reimbursements/expense claims | Payable to employee | 2 working days | Generally exempt |
| Notice period shortfall | Recovered from employee | Adjusted before final payout | Not taxable (net-off) |
| Loans/advances outstanding | Recovered from employee | Adjusted before final payout | N/A |
If the notice period recovery is the messy part of your F&F, EZHRM’s notice period recovery calculator handles the shortfall math separately so your F&F sheet only has to import a clean number. Similarly, if leave encashment is the bulk of the payout, cross-check it with the leave encashment calculator before it goes into the final figure — encashment errors are one of the most common sources of F&F disputes we see.
How TDS Works on F&F Payouts
TDS on F&F is deducted under Section 192 as if the sum were regular salary, with two carve-outs: leave encashment stays exempt up to the lifetime ₹25 lakh limit (raised from the old ₹3 lakh ceiling via CBDT Notification 31/2023, applicable retrospectively from 1 April 2023), and gratuity stays exempt up to ₹20 lakh under the Payment of Gratuity Act. Anything above these caps, or any other cash component like ex-gratia or bonus, gets taxed at the employee’s applicable slab and must be reflected correctly in that quarter’s Form 24Q and the year’s Form 16.
A quick sanity check before you release any F&F: does the taxable portion match what you’re about to report to the Income Tax Department? Mismatches here are the number one reason F&F queries land back on an HR manager’s desk six months after the employee has already left.
Step-by-Step F&F Process for HR Teams
- Freeze the last working day the moment resignation or termination is confirmed — this is what starts the 2-day clock.
- Pull attendance and leave balances up to the last working day from your leave management records.
- Calculate notice period shortfall, if the employee didn’t serve full notice, using the appointment letter’s terms.
- Compute gratuity separately if the employee has crossed 5 years — remember, it runs on its own 30-day clock.
- Net dues against deductions — salary, leave encashment, bonus minus notice shortfall, loans, and asset recoveries.
- Apply TDS on the taxable portion and generate the final payslip/settlement statement.
- Disburse within 2 working days and issue the relieving letter, experience certificate, and Form 16 (at year-end) alongside it.
Running this manually across even a handful of exits a month adds up fast — this is where most of the compliance risk in payroll management quietly builds up. An HRMS that automates the netting and flags the 2-day deadline on its own removes the guesswork.
What HR Managers Get Wrong on F&F
Treating gratuity and F&F as one deadline. They’re governed by different clocks — mixing them up is the single most common delay we hear about.
Forgetting the lifetime cap on leave encashment. If an employee has claimed part of their ₹25 lakh exemption at a previous employer, your payroll team won’t know unless you ask for a declaration — and the Income Tax Department will still catch the shortfall.
Recovering notice pay incorrectly. Some HR teams still calculate notice recovery on gross salary instead of the terms specified in the appointment letter or standing orders, which invites disputes and, occasionally, labour court notices.
No paper trail on deductions. Every deduction from an F&F — asset recovery, loan balance, training bond — needs a documented basis. Verbal agreements don’t hold up if the employee escalates.
Missing the 2-day window because of manual processes. This is the newest and costliest mistake. A fine of up to ₹50,000 for a first offence, and up to ₹1 lakh or three months’ imprisonment on repeat, is not a risk worth carrying because your F&F sheet lives in someone’s personal laptop.
FAQs
Is the 2-day F&F rule applicable to all companies in India?
Yes, once state governments notify the Code on Wages rules for their jurisdiction, the 2-working-day payment requirement under Section 17(2) applies to all employers, regardless of company size, for any employee who resigns, is terminated, or is retrenched.
Does the 2-day rule include gratuity?
No. Gratuity is governed separately under the Payment of Gratuity Act (soon the Code on Social Security) and must be paid within 30 days of it becoming due, independent of the 2-day wage settlement clock.
Can an employer deduct notice pay shortfall from F&F?
Yes, if the appointment letter or applicable Standing Orders specify a notice period and a buyout/recovery clause, the employer can adjust the shortfall against dues in the F&F, provided the calculation is documented and consistent with the employment contract.
Is leave encashment fully tax-free in F&F?
For non-government employees, leave encashment is exempt under Section 10(10AA) up to a lifetime limit of ₹25 lakh across all employers. Any amount encashed beyond this cumulative limit is taxable as salary income in the year of receipt.
What happens if an employer misses the 2-day deadline?
A delayed or short F&F settlement is treated as a wage offence under Section 54 of the Code on Wages, attracting a fine of up to ₹50,000 for a first violation, rising to ₹1 lakh or up to three months’ imprisonment for repeat offences within five years.
How is F&F different from gratuity settlement?
F&F covers all wage-related dues (salary, leave encashment, bonus, reimbursements) minus deductions, settled within 2 working days. Gratuity is a separate, one-time retirement benefit for employees with 5+ years of service, settled within 30 days under its own Act.
Getting F&F right in 2026 isn’t optional anymore — the 2-day rule means there’s no room for a “we’ll sort it out next payroll cycle” approach. If you’d rather not run this math by hand every time someone resigns, EZHRM’s full and final settlement calculator does the netting for you, and it’s part of a wider set of free HR calculators built for exactly this kind of day-to-day payroll decision. For more on staying compliant with the new codes, browse the EZHRM blog or see how compliance management can be automated end to end.