Quick answer: full and final (F&F) settlement = salary for days worked in the last month + leave encashment + gratuity (if eligible) + bonus, incentives and reimbursements due − notice period shortfall − loans and advances − other recoveries − TDS. Under the Code on Wages, wages due on exit must be paid within two working days, so the calculation needs to be ready quickly.
Work out an estimate with the full and final settlement calculator. This guide explains each component and walks through an example.
The components of F&F
| Add | Deduct |
|---|---|
| Salary for days worked in the final month | Notice period shortfall |
| Leave encashment for unused earned leave | Loans and salary advances outstanding |
| Gratuity, if eligible | Unreturned assets or damages as per policy |
| Bonus, incentives, arrears | Excess leave taken |
| Pending reimbursements | Other agreed recoveries |
| Notice pay, if the employer releases early without notice | TDS on taxable amounts |
HR, GPS attendance, shifts, leave, payroll, tax declarations, onboarding, engagement, projects and timesheets — one employee record behind all of it.
Start free See the demo1. Salary for days worked
Salary = monthly gross ÷ days in the month × days worked
Some companies divide by 30 or by working days instead of calendar days. Use the method written in your policy and apply it the same way to everyone.
2. Leave encashment
Leave encashment = (basic + DA) ÷ 30 × unused earned leave days
The divisor and components come from your leave policy. At exit, part or all of it may be tax-exempt. See leave encashment calculation.
3. Gratuity
Gratuity = last drawn basic + DA × 15 × years of service ÷ 26
Permanent employees usually need five years of continuous service; fixed-term employees qualify after one year under the Code on Social Security. Gratuity must be paid within 30 days of becoming payable. See the gratuity calculation guide.
4. Bonus, incentives and reimbursements
Include statutory bonus if applicable, earned incentives according to the plan rules, arrears from increments and approved expense claims.
5. Notice period shortfall
If an employee leaves without serving the full notice, the contract may allow recovery:
Recovery = monthly salary (as defined in the contract) ÷ days in the month × notice days not served
Many employers waive part of the shortfall, adjust it against leave, or agree a buy-out. If the employer asks someone to leave before the notice period ends, it usually pays for the remaining notice instead.
6. Loans, advances and other recoveries
Deduct outstanding salary advances, loan balances and agreed recoveries for assets not returned. Keep documents that show the employee agreed to these deductions.
7. Tax
Salary, bonus and notice pay are taxable in the usual way. Gratuity and leave encashment on exit may be exempt within limits. Recalculate TDS for the year up to the exit date so the employee does not face a large tax bill later.
Worked example
Neha resigns after 6 years 8 months. Her last working day is 20 June. Her notice period is 60 days, of which she serves 45.
| Input | Value |
|---|---|
| Monthly gross salary | ₹90,000 |
| Basic + DA | ₹45,000 |
| Days in June / days worked | 30 / 20 |
| Unused earned leave | 18 days |
| Service for gratuity | 6 years 8 months → 7 years |
| Pending reimbursements | ₹6,500 |
| Salary advance outstanding | ₹20,000 |
| Notice shortfall | 15 days |
| Component | Calculation | Amount |
|---|---|---|
| Salary for 20 days | 90,000 ÷ 30 × 20 | ₹60,000 |
| Leave encashment | 45,000 ÷ 30 × 18 | ₹27,000 |
| Gratuity | 45,000 × 15 × 7 ÷ 26 | ₹1,81,731 |
| Reimbursements | ₹6,500 | |
| Gross payable | ₹2,75,231 | |
| Notice shortfall | 90,000 ÷ 30 × 15 | −₹45,000 |
| Salary advance | −₹20,000 | |
| Net before TDS | ₹2,10,231 |
TDS would then be worked out on the taxable part: salary for the month and any taxable portion of the other components.
Timelines to plan for
| Item | Timeline |
|---|---|
| Wages due on exit | Within two working days under Section 17(2) of the Code on Wages |
| Gratuity | Within 30 days of becoming payable |
| Experience and relieving letters | On or soon after the last working day |
| PF exit update | Promptly, so the employee can transfer or withdraw |
| Form 16 or salary TDS certificate | After the financial year, as required |
The two-day rule means F&F can no longer wait for the next payroll cycle. Prepare the calculation during the notice period.
The F&F process step by step
- Accept the resignation in writing and confirm the last working day
- Start the exit checklist: handover, access removal, asset return
- Collect clearances from IT, finance, admin and the manager
- Freeze inputs: attendance, leave balance, reimbursements, loans
- Calculate F&F and have finance review it
- Share a settlement statement with the employee
- Pay within the required timeline
- Issue letters: experience letter, relieving letter and settlement statement
- Update PF and records and close the employee profile
Special situations
Termination for misconduct: unpaid wages must still be settled. Gratuity can be forfeited only in the limited situations the law allows, after due process.
Death of an employee: pay dues to the nominee or legal heirs. The minimum service condition for gratuity does not apply, and settlement should be handled with extra care and speed.
Absconding employees: document attempts to contact the employee, follow your policy and any notice requirements, and hold the settlement ready rather than ignoring it.
Fixed-term contract ending: the contract end date is the exit date. Remember proportionate gratuity after one year of service.
Retrenchment: retrenchment compensation under labour law may be payable in addition to the usual components. Take legal advice on the amount and process.
The settlement statement
Give the employee a one-page statement listing every addition and deduction with the calculation, the net amount, payment date and mode, and contact details for questions. Ask the employee to acknowledge it. A clear statement prevents most F&F disputes and protects both sides.
Common mistakes
- Waiting for the next payroll run to settle
- Forgetting gratuity for someone just past five years, or for fixed-term staff after one year
- Using CTC instead of basic + DA for leave encashment or gratuity
- Deducting notice shortfall that the manager had already waived
- Not issuing a written statement, which leads to disputes later
Making exits smoother
A clean exit depends on accurate data collected long before resignation: joining date, salary structure, leave balances and loans. MizUp BMS keeps these together with onboarding and exit checklists and HR letters, so HR can prepare a settlement statement quickly. Use the gratuity calculator and leave encashment calculator for the individual parts.
Frequently asked questions
What is full and final settlement?
The last payment an employer makes to an employee who leaves, covering unpaid salary, leave encashment, gratuity if eligible, bonus and reimbursements, minus recoveries such as notice pay shortfall and advances.
What is the formula for full and final settlement?
F&F = salary for days worked + leave encashment + gratuity + bonus and incentives + reimbursements − notice shortfall recovery − loans and advances − other recoveries − TDS.
How soon must F&F be paid?
Section 17(2) of the Code on Wages requires wages due on resignation, removal, dismissal or retrenchment to be paid within two working days. Gratuity has its own 30-day timeline. Confirm with your adviser how your policy applies other components.
How is notice pay recovery calculated?
Usually (monthly salary as defined in the contract ÷ days in the month) × notice days not served. Some contracts use basic pay instead of gross.
Is full and final settlement taxable?
Salary, bonus and notice pay are taxable. Gratuity and leave encashment at exit can be partly or fully exempt within the limits of the tax law.
