Full and final settlement (F&F) is the last payment to an employee who leaves: salary up to the last working day plus everything else they are owed, minus any recoveries. Since the Labour Codes came into force on 21 November 2025, the timeline is much tighter than most companies are used to.
The two-working-day rule
The appropriate government can prescribe a different time limit in particular circumstances, so also check your state’s rules. For regular monthly pay, the Code requires payment before the seventh day of the following month.
What goes into the settlement
| Component | What to check |
|---|---|
| Salary up to the last working day | Pro-rated for the days worked in the final month, less any loss-of-pay days. |
| Leave encashment | Unused earned leave as per your policy; under the OSH Code, workers can encash leave to their credit at separation. |
| Notice period | Pay for notice served, or a recovery if the notice period was cut short without being waived. |
| Gratuity | If eligible (five years, or one year for fixed-term employees), on the last drawn wages. See gratuity calculation. |
| Bonus and incentives | Statutory bonus due for the year, and any earned incentives as per policy. |
| Reimbursements | Approved expense claims not yet paid. |
| Recoveries | Salary advances, loans and unreturned company assets, as allowed by law and the employment terms. |
| Tax (TDS) | Worked out on the final month’s taxable amount under the employee’s chosen regime. |
Step-by-step checklist
- Confirm the last working day and the notice period served, in writing.
- Collect company assets — laptop, ID card, access cards — and record anything outstanding.
- Close attendance and leave for the final month so days payable and leave balance are final.
- Calculate the settlement: salary, leave encashment, gratuity, bonus, reimbursements, minus recoveries and TDS.
- Pay within two working days of the exit.
- Mark the date of exit on the EPFO portal so the employee can transfer or withdraw their PF.
- Issue documents: the settlement statement, relieving and experience letters, and Form 16 for the year when due.
- Hand over pending approvals the employee was responsible for, and remove their system access.
Tax points
- Leave encashment at retirement or resignation is tax-free for private-sector employees up to ₹25 lakh; leave encashed during service is taxable.
- Gratuity is tax-free up to ₹20 lakh for private-sector employees.
- Everything else in the settlement is taxed as salary.
SetuWork’s offboarding keeps each exit in one place: outstanding assets, the exit interview and the full-and-final settlement, while the person’s pending approvals move to their own senior automatically. See HRMS software.
Sources
- Code on Wages, 2019 — Section 17 (Indian Kanoon)
- Ministry of Labour & Employment — Additional FAQs on Labour Codes (as on 16.03.2026)
- Nexdigm — 2-day full and final settlement now mandatory under Labour Codes
- CBDT — leave encashment exemption raised to ₹25 lakh (notification 31/2023)
- EPFO — Unified Member Portal
This guide is general information to help HR and payroll teams, not legal or tax advice. Rules change and can depend on your circumstances — confirm with the official source or your consultant before acting on it.