Full and final settlement: a complete guide

Full and final settlement (F&F) is the last payroll event for a departing employee, and the one most likely to cause a dispute if handled poorly. It nets everything the company owes the employee against everything the employee owes the company, applies the right tax treatment, and closes the relationship. Done well, it leaves a good final impression. Done badly, it is the top source of ex-employee complaints.

What the F&F includes

The settlement is a balance of earnings and recoveries.

Earnings	Recoveries
Salary up to the last working day	Notice-period shortfall, if any
Leave encashment	Outstanding loan or advance balance
Gratuity, if eligible	Unreturned asset value
Pending reimbursements	Excess leave taken
Statutory bonus due, if any	TDS on taxable components

How the big items are taxed

Two components carry meaningful tax rules.

• Gratuity is exempt under section 19(1) of the Income-tax Act, 2025 (formerly section 10(10)). For employees covered by the Code on Social Security, the exemption is the least of the actual gratuity, ₹20 lakh, and the formula amount.
• Leave encashment on resignation or retirement is exempt up to ₹25 lakh under section 19(1) (formerly section 10(10AA)), with the balance taxable.

Notice-pay recovery, where the employee leaves before serving full notice, is handled per policy. The basis (Basic or gross) should be defined and applied consistently.

Clearance and asset return

Most delays in F&F are not caused by payroll; they are caused by pending clearances. Before the settlement can be finalised, departments confirm there are no dues: IT reclaims assets and access, finance confirms no outstanding advances, and the manager confirms the knowledge handover. A clearance tracker with owners and due dates keeps this moving.

Timelines

The Code on Wages, 2019 changed the timeline. Wages due to an employee who resigns, is removed, dismissed or retrenched, or whose establishment closes, must be paid within two working days of the last day. Gratuity must be paid within 30 days of becoming payable. The old practice of settling in 30 to 45 days now breaches the wage deadline, so run clearances during the notice period, not after it.

Worked example

For an employee leaving with salary due, leave encashment and gratuity, against a short notice and a loan balance:

Item	Amount
Salary till last working day	₹58,400
Leave encashment	₹42,300
Gratuity	₹1,24,000
Less: notice shortfall	−₹22,000
Less: loan balance	−₹18,500
Less: TDS	−₹9,700
Net settlement	₹1,74,500

The net is best shown in words on the settlement statement, and mirrored in the relieving and experience letters.

Common mistakes to avoid

• Delaying the F&F because clearances are not tracked.
• Applying the wrong exemption on gratuity or leave encashment.
• Inconsistent notice-recovery basis across employees.
• Not returning or valuing company assets.

Frequently asked questions

How long can F&F take? Wages are due within two working days of the last day under the Code on Wages, and gratuity within 30 days of becoming payable.

Is leave encashment fully exempt? No, only up to ₹25 lakh on exit; the balance is taxable.

Can we withhold F&F until assets are returned? Asset recovery is usually netted in the settlement rather than used to withhold it entirely; follow policy and law.

Key takeaways

• F&F nets salary, leave encashment and gratuity against notice, loans, assets and TDS.
• Gratuity and leave encashment have their own exemptions.
• Clearance tracking, not payroll, is usually the bottleneck.
• Pay wages within two working days and gratuity within 30 days, then issue the letters.

NeevHR computes the F&F with the gratuity and leave-encashment exemptions, tracks clearances with owners, shows the net in words, and generates the relieving and experience letters.

This article provides general information for educational purposes. Statutory rules, thresholds, rates and filing requirements may change; verify with the relevant authority or a qualified professional. Last reviewed: 03 Nov 2026.