Full and Final Settlement: Checklist and Timelines

By Khanal Group · Payroll and labour · Updated 25 October 2026 · Not legal or tax advice

The timelines

Two statutory clocks start on the last working day:

Wages: two working days. Section 17(2) of the Code on Wages 2019, in force from 21 November 2025, requires wages payable to an employee who has been removed or dismissed, retrenched, has resigned, or became unemployed because the establishment closed, to be paid within two working days of that event. The Payment of Wages Act 1936 applied this rule only where the employer ended employment and only up to a wage ceiling; the Code covers resignations and has no ceiling.
Gratuity: 30 days. Under s.56 of the Code on Social Security 2020 the employer pays gratuity within 30 days of the date it becomes payable. Late payment carries simple interest.

The Ministry of Labour's compliance handbook summarises the event-based duty as "wages within 2 days; gratuity within 30 days". Many companies still run a 30 to 45 day F&F cycle out of habit. For wages, that cycle is now too slow, so split the settlement: wages and other wage items within two working days, and the remaining items (gratuity, reimbursements awaiting bills) on their own timelines.

What goes into the settlement

Component	Basis	When	Points to check
Salary to the last working day	Pro rata for days worked in the final month	Two working days	Loss-of-pay days, attendance closed for the month
Notice pay paid by employer	Appointment letter or standing orders, where the employer releases without notice	Two working days	Taxable as salary
Notice shortfall recovered	Appointment letter, where the employee leaves early	Netted in settlement	Must be an authorised deduction; 50% cap per wage period
Leave encashment	OSH Code s.32 for workers, state Shops and Establishments Act, and company policy	With wages	Days, rate (basic or gross) per policy
Statutory bonus	Code on Wages s.26: 8.33% minimum, 20% maximum, for employees up to the wage limit with 30 days' work in the year	Per Code timeline; often paid pro rata in F&F	Eligibility wage limit ₹21,000 a month and calculation ceiling of ₹7,000 or the minimum wage fixed by the Central Government, whichever is higher (S.O. 4711(E) and S.O. 4710(E) of 25 August 2026)
Gratuity	15 ÷ 26 × last wages × completed years; five years for permanent staff, one year for fixed-term	Within 30 days	Wages under the Code's 50% rule; ₹20 lakh ceiling
Reimbursements and arrears	Policy, bills submitted	On approval	Cut-off date for claims
Deductions	Employee PF and ESIC on the final wages, professional tax, TDS, advances and loans	Netted	Code on Wages s.18 list of authorised deductions

Deductions from wages are limited to those authorised by s.18 of the Code on Wages: absence, damage or loss, recovery of advances or loans, fines after a hearing, house accommodation and amenities, and statutory deductions such as tax and PF. Total deductions in a wage period cannot exceed 50% of wages. An asset not returned or a large notice recovery can run into that cap; the safer course is to settle the recovery separately or by agreement, and record it.

Worked example

Round illustrative numbers. An employee of ABC Infra Private Limited resigns and leaves on 20 November 2026 after six years and three months of service. Monthly gross pay is ₹60,000, of which basic and DA are ₹30,000; the other allowances are exactly 50% of pay, so wages under the Code are ₹30,000. The employee served 20 of the 30 days' notice required, leaving a 10-day shortfall, and has 15 days of earned leave, encashable on basic under the policy. The employee is not eligible for statutory bonus because wages exceed the eligibility limit.

Item	Working	Amount (₹)
Salary, 1 to 20 November	60,000 × 20 ÷ 30	40,000
Leave encashment	30,000 ÷ 30 × 15	15,000
Gratuity (paid within 30 days)	15 ÷ 26 × 30,000 × 6 (three months do not round up)	1,03,846
Less: notice shortfall	60,000 × 10 ÷ 30	(20,000)
Less: employee PF	12% of wages earned, 20,000	(2,400)
Less: professional tax (Maharashtra)	Monthly slab	(200)
Less: TDS on salary, illustrative	s.392 [192], on estimated annual income	(4,000)
Net payable		1,32,246

The wage items (₹55,000 less deductions) fall due within two working days of 20 November. Gratuity of ₹1,03,846 may follow, but within 30 days. The part year of three months does not count because only a part year of more than six months rounds up. Check your own figures with the F&F settlement calculator, the gratuity calculator and the leave encashment calculator.

Tax treatment basics

Salary, notice pay and bonus are taxable salary. TDS is under s.392 of the Income-tax Act 2025 [192], computed on the year's estimated salary including what the employee tells you about a new employer, if anything.
Gratuity: s.19 [10(10)] exempts the least of the amount received, the statutory amount and ₹20 lakh for non-government employees; the excess is salary.
Leave encashment on leaving service: s.19 [10(10AA)] exempts, for non-government employees, the least of the prescribed limits with a lifetime cap of ₹25 lakh across employers. Encashment during service is fully taxable.
Notice shortfall recovered reduces what the employer pays; whether the employee can reduce taxable salary by it is a question for the employee's own return and their CA.
Certificate: Form 130 [16] for the tax year, issued by 15 June after the year ends. The quarterly salary TDS statement is Form 138 [24Q].

PF, ESIC and gratuity records on exit

PF: deduct and pay PF on the final wages in that month's ECR, and mark the date of exit on the EPFO employer portal so the employee can transfer or withdraw. The employer does not pay out PF; the member claims it from EPFO.
ESIC: contributions on the final wages; benefits continue for the contribution period already paid.
Gratuity nomination: pay the employee, or the nominee on death, against the nomination on file.
Professional tax: deduct for the final month under the state slab; see professional tax by state.

Exit documents

Acceptance of resignation, or termination letter with reasons where the law or standing orders require them.
No-dues clearance: assets, advances, access cards, laptops.
F&F statement showing every component and deduction, signed by the employee on receipt.
Relieving letter and experience or service certificate.
Payment proof for wages and, separately, gratuity.
Form 130 after the tax year; a salary statement for the part year if the new employer asks for it.

F&F checklist

Last working day confirmed; attendance and leave closed.
Wages for the period, leave encashment and bonus worked out; deductions checked against s.18 and the 50% cap.
Wage items paid within two working days.
Gratuity eligibility checked (five years, or one year for fixed-term) and paid within 30 days.
PF exit date marked; final ECR and ESIC include the leaver.
Letters issued; F&F statement filed.

K-HR sends exits, leave and paid days to K-Finance payroll for review, and its gratuity tracker shows when an employee reaches five years; K-Finance works out the pay, PF, ESI, PT, bonus and gratuity. This guide states the rules; confirm unusual cases, such as disputed recoveries or retrenchment compensation, with your adviser.

Common questions

What is the time limit for full and final settlement in India?

Section 17(2) of the Code on Wages 2019 requires wages due to an employee who is removed, dismissed, retrenched, has resigned or became unemployed because the establishment closed to be paid within two working days. Gratuity is payable within 30 days of becoming payable under the Code on Social Security.

Does the two-working-day rule apply to resignations?

Yes. The Payment of Wages Act 1936 applied it only where the employer ended employment; section 17(2) of the Code on Wages expressly covers an employee who has resigned, and the Code has no wage ceiling.

Can the employer recover notice pay from final dues?

If the appointment letter provides for it, a notice shortfall is usually recovered from the final settlement. Deductions from wages must be of a kind authorised by section 18 of the Code on Wages, and total deductions in a wage period cannot exceed 50% of wages; take advice where the recovery is large.

Is leave encashment on resignation taxable?

Leave encashment received on leaving service is exempt for a non-government employee up to the least of the statutory limits, with a lifetime cap of ₹25 lakh, under s.19 of the Income-tax Act 2025 [10(10AA)]. Leave encashed while still in service is taxable salary.

What replaced Form 16 for the final year?

From 1 April 2026 the salary TDS certificate is Form 130 under s.395(4)(b) of the Income-tax Act 2025 and the 2026 Rules. It is issued by 15 June after the tax year, including to employees who left during the year.

Is gratuity part of the two-day payment?

No. Gratuity has its own timeline: within 30 days of becoming payable (s.56 of the Code on Social Security). Many employers pay it with the F&F, but a separate payment within 30 days is compliant.

Full and final settlement: components, timelines and documents