Full and final settlement (FnF) is the last financial step of an exit, and it is where a majority of HR disputes begin. With the Labour Codes that came into effect on November 21, 2025, both the timeline and the calculation base have altered. Here is what FnF includes, how to calculate it and how HR can handle it.
What is Full and Final Settlement (FnF Full Form)?
The FnF full form is Full and Final Settlement, and it is also written as F&F. The meaning of FnF is the calculation & settlement of all dues between an employer and an employee when the employment ends. This can happen by means of resignation, termination, retrenchment, retirement or closure of the establishment.
It works both ways. For example, the employee who is released gets all the employee earnings, benefits and the employer gets back the employee’s debt, such as advances, notice shortfall, etc.
What Is Included in Full and Final Settlement?
This “full and final settlement” will include all the amounts due from the employer to the employee and all amounts due from the employee, who is leaving, towards the employer. At the time of the exit, the net payable figure in the settlement statement should list an amount due to the employee from the employer (the employee side) and an amount due from the employee towards the employer (the employer side).
Amounts payable to the employee:
- The employee gets a salary for days worked in the last month of employment
- The employee receives leave encashment for all leave incurred that is eligible for encashment under company policy and applicable law.
- If so, the employee receives gratuity for their tenure, subject to eligibility conditions such as minimum years of service.
- Any pending bonuses, incentives, or commissions that are still earned but not yet paid will be paid to the employee.
- The employee must be reimbursed for all approved expense claims that are still open.
- The employee receives nightly pay or retrenchment compensation when their exit situation and contract conditions require it.
Amounts recoverable from the employee:
- If the contract allows it, the employer can deduct an amount for any part of the notice period the employee did not work.
- Any unpaid salary advances or loans may also be deducted from the final settlement.
- The employer can charge for company property the employee has not returned, based on its assessed value.
- Tax must be deducted at source from any taxable parts of the settlement.
Full and Final Settlement Rules in India (Labour Codes 2025)
The Labour Codes, which came into effect on 21 November 2025, now regulate every settlement and set timelines to fill the gaps. These regulations must be viewed by employers as compliance deadlines that risk a complaint before the labour authorities if they are missed.
Three laws now shape the rules:
- Section 17(2) of the Code on Wages, 2019, requires an employer to pay wages within two working days of the employee’s removal, dismissal, retrenchment or resignation.
- The Code on Social Security, 2020, governs gratuity under Sections 53 to 58, and it requires the employer to pay gratuity within 30 days of it becoming payable.
- Retrenchment compensation and standing orders are also governed by the Industrial Relations Code (2020).
One point to keep in mind for future reference is that Section 17 does not mention full and final settlement at all. It only stipulates two working days for payment of the parts/sectors of the settlement that are defined as wages under the Code, and the same is not true of the other components here. Whether leave encashment bears the figure of “wages” for this purpose is likely to be contested. The less risky approach would be to pay all salary-like items within two working days of the exit.
How the 50% Wage Rule Changes FnF
According to the Code on Wages, under Section 2(y). It defines the term “wage” as basic pay, dearness allowance and retaining allowance. Only low-rank allowances, other than gross pay, can exceed 50% of the total pay, so wages are at least 50% of the CTC; per industry guidance, this is now applied to gratuity, leave encashment, and bonus, as the industry guidance explains.
- Gratuity: It is on last drawn wages; as a result, higher wages show a higher gratuity.
- Leave encashment: They are based on daily wages, so an unused leave day is now more expensive.
- Bonus: It is calculated on wages, but only employees whose wages are ₹21,000 per month or less are eligible, and the calculation is limited to the lower of ₹7,000 or the national minimum wage, whichever is higher. The minimum bonus is 8.33%, and the maximum is 20%. Accordingly, the rule changes on bonus apply to lower-paid employees only.
Under the old 40% basic structure, for instance, an employee with a CTC of ₹12,00,000 earned ₹40,000 as wages. This will be increased to a minimum of ₹50,000 under the new wage rules.
Full and Final Settlement Timeline
The FnF settlement timeline varies by component, as each component is governed by a different law or policy. Therefore, HR should note each component against its own due date, rather than a single due date for the whole settlement.
| Component | Timeline | Source |
| Wages (salary, and conservatively leave encashment) | Within 2 working days of exit | Code on Wages, s.17(2) |
| Gratuity | Within 30 days of becoming payable | Code on Social Security |
| Other dues (bonus, reimbursements) | As per company policy and applicable law | Policy |
Still, many companies operate settlements on a 30- to 60-day cycle for everything. This won’t work for the wages component because the law now requires wages to be paid within 2 working days.
How to Calculate Full and Final Settlement
The settlement consists of 4 parts, and each uses a different base.
- Salary for days worked: Monthly gross pay ÷ 30 × days you worked.
- Leave encashment: (monthly wages ÷ 30) × unused leave days.
- Gratuity: Last drawn wages × 15 ÷ 26 × completed years of service (15 days’ wages per year; 26 is working days per month). Five years of service is required, or one year for fixed term. A part year of more than six months counts against a full year.
- Bonus (if eligible): Real wages crossed the actual calculation ceiling × the number of months worked × Bonus rate.
Worked example: The last working day is 15 Nov. The employee’s monthly gross pay is ₹1,00,000, wages ₹50,000/-, service is 6 years, 12 unused leave days. Bonus Exclusive: because wages are above ₹21,000, the employee is ineligible.
| Item | Calculation | Amount |
| Salary for 15 days | ₹1,00,000 ÷ 30 × 15 | ₹50,000 |
| Leave encashment | ₹50,000 ÷ 30 × 12 | ₹20,000 |
| Gratuity | ₹50,000 × 15 ÷ 26 × 6 | ₹1,73,077 |
| Reimbursement | Approved claim | ₹5,000 |
| Gross payable | ₹2,48,077 | |
| Less: laptop advance | (₹10,000) | |
| Net before TDS | ₹2,38,077 |
If wages had been left as old ₹40,000, the gratuity would have been ₹1,38,462, which is ₹34,615 lower.
Tax on Full and Final Settlement Components
- Salary, Notice pay and bonus are treated as salary and taxed as per applicable slab rates for the employee and subject to TDS.
- Gratuity: Private sector employees working under the gratuity law can claim an exemption comprising the lowest amount of the following: ₹20 lakh, the actual amount received, or the formula amount.
- Leave encashment: The exemption starts applying to amounts up to ₹25 lakh, limited by a four-part least-of rule in the event of retirement or resignation. Grants of leave during service are completely taxable. Treatment of leave in respect of resignation is subject to litigation; courts have personal interpretations that resignation is no different from retirement, so it needs to be confirmed with your tax team.
- Retrenchment compensation: There are conditions under which you can claim an exemption up to ₹5 lakh.
The Income-tax Act, 2025 shall take effect from 1 April 2026 and would renumber these sections. Sources say the limits remain unchanged, but verify the current sections prior to preparing Form 16.
Step-by-Step FnF Process for HR
For HR to do the settlement in the legal time frame without making any last-minute corrections, a fixed process is required. Typically, the sequence of work found below is typical for these steps.
- Register the exit date: Confirm the last working day and update it in the HRMS.
- Start clearances earlier: Trigger IT, finance, admin and manager clearances during the notice period, not after exit.
- Calculate earnings: Get salary, leave balance, bonus and reimbursements from payroll.
- Calculate gratuity on revised wage definition.
- Only lawful deductions apply, as permitted under section 18 in the Code on Wages.
- Deduct TDS and create the statement.
- Disburse & record: Process an employee’s wage component within two working days, pay gratuity within 30 days and provide the FnF statement to the employee.
Common FnF Delays and Disputes
Payment disputes arise from many repeat argument statements that, most of all, can be eliminated through proper planning. Recognise the causes of these disputes to rectify the process as opposed to dealing with each complaint separately.
- Payment is usually delayed until IT, finance or the reporting manager has signed off on the clearance.
- Gratuity is sometimes calculated based on basic pay alone, despite the new definition of wage in the Labour Codes.
- A dispute arises when the employer deducts a shortfall in notice period or asset value without a clear basis in the employment contract.
- In some cases, the employer withholds wages to coerce negotiation that is not related to wages raised in a complaint.
- Some employers force the employee to sign a no-claim agreement before releasing the payment.
- The allowance of earned wages that have been earned during absconding is often unclear, and so the employer must consult counsel before deciding.
A periodic HR audit shows where these delays usually originate, and HR automation largely eliminates the manual steps that cause them.
Full and Final Settlement Letter and Payslip Format
Final settlements are no longer something to leave until the end of the month payroll run. Under the Labour Codes, wages must be paid within two working days, gratuity has a separate 30-day deadline, and the 50% wage rule may affect the final amount owed. A well-managed process can help you complete exits on time, reduce disputes, and protect your organisation’s reputation.
Here are four practical steps:
- Review salary structures against the 50% wage rule and update the basis used to calculate gratuity.
- Start clearance tasks as soon as a resignation is accepted, and run them in parallel.
- Set a two-working-day payroll alert in your HRMS to help meet the wage deadline.
- Give the employee a draft full and final (FnF) statement to review before payment.
These are four good habits; exits for both sides will be smooth. For more guidance, explore ThePeoplesBoard HR guides.
Conclusion
Under the Labour Codes, full and final settlement is a compliance requirement, not simply an HR courtesy. Separate wages from other payments, pay outstanding wages within two working days, and recalculate gratuity using the revised definition of wages. Begin the clearance process during the notice period and make sure the HRMS exit date matches the payroll record. Review the exit interview process, too, so it doesn’t delay settlement.
FAQs
What is FnF settlement in simple words?
An FnF settlement is essentially the final calculation and payment of all the amounts due to the employee from the employer upon exit, after deducting any amounts due from the employee to the employer. Everything is included: salary, leave encashment, and gratuity.
What is the FnF settlement timeline in India?
Wages have to be paid within two days of the employee leaving, as per the Code on Wages. The gratuity is payable within 30 days of the expiration of service. The rest are based on the policy and the applicable law.
Is the full and final settlement paid on the last working day?
It is not necessarily on the same date as the exit, but the wage component is due after two working days. The two days start from when the resignation is effective, that is, the last working day.
Can an employer hold FnF if the employee has not served the notice period?
An employer can recover a notice shortfall only if the contract allows and only through lawful deductions. Leaving one snubbing all dues is hard on principles; recover the shortfall from the settlement amount and pay the balance by the applicable due date.
Is gratuity paid if the employee resigns before five years?
Generally, no, but if they have completed at least 5 years of continuous service with the company. The exception to this is death or disablement, and fixed-term employees who qualify after one year pro rata.
Is full and final settlement taxable?
It depends on the component. Salary, notice pay and remuneration are taxable; gratuity and leave encashments are exempt up to the limit. TDS applies to the taxable portion.
