What is Full and Final Settlement (FnF)?
Full and Final Settlement is the complete financial settlement an employer makes to an employee upon separation, whether through resignation, termination, retirement, or end of contract. It consolidates all dues owed by the employer and deducts any amounts owed by the employee, resulting in a single net payout (or, in rare cases, a demand on the employee).
A correct FnF statement is not optional. Under Section 17(2) of the Code on Wages, 2019 (effective 21 November 2025), wages due to an employee who resigns, or is removed, dismissed or retrenched, must be paid within two working days. Delays can lead to a claim before the authority under the Code and penalties.
Which calculator do I need?
- Notice period calculator: you have resigned (or are about to) and want your last working day.
- Notice period buyout calculator: you want to leave early and need the amount to pay or recover for unserved notice days.
- Full and final settlement calculator: you know your last day and want the net amount of your final dues (salary, leave, gratuity, bonus, minus recoveries).
Worked example (the sample values)
Asha resigns after 6 years 8 months. Gross pay is ₹80,000 a month and basic + DA is ₹32,000. She worked 18 days in her last month, has 22 days of earned leave, and served 30 of her 90 days' notice.
| Component | Working | Amount |
|---|---|---|
| Salary for days worked | ₹80,000 ÷ 26 × 18 | ₹55,385 |
| Leave encashment | ₹32,000 ÷ 30 × 22 | ₹23,467 |
| Gratuity wages | Basic is 40% of gross, so topped up to 50% | ₹40,000 |
| Gratuity | 15 × ₹40,000 × 7 years ÷ 26 (8 months rounds up) | ₹1,61,538 |
| Notice shortfall | ₹80,000 ÷ 30 × 60 unserved days | −₹1,60,000 |
| Net FnF | Earnings ₹2,40,390 − deductions ₹1,60,000 | ₹80,390 |
If Asha's new employer buys out her notice, the ₹1,60,000 deduction disappears. Model that with the notice period buyout calculator.
FnF Components Explained
1. Unpaid Salary for the Partial Last Month
Your last month of work is rarely a full calendar month. The standard formula is:
Divisor is 26 working days (most companies) or 30 calendar days (some policies). Check your appointment letter.
2. Earned Leave Encashment
Unused earned leave (also called privilege leave) accumulated up to your last working day must be encashed. Most companies follow:
Tax treatment under Section 19 of the Income-tax Act, 2025 (earlier Section 10(10AA)): the amount is exempt up to the least of (a) actual amount received, (b) Rs 25 lakh lifetime aggregate (raised from Rs 3 lakh by CBDT Notification 31/2023), (c) 10 months' average basic salary, or (d) cash equivalent of leave at 30 days per year of service minus leave availed. This exemption applies under both old and new tax regimes.
3. Gratuity
Under the Code on Social Security, 2020, gratuity is payable after 5 years of continuous service for permanent employees and after 1 year for fixed-term employees. Some High Courts have counted 4 years and 240 days as 5 years; treat that as case law, not a settled rule. Wages for gratuity are basic + DA, topped up if allowances exceed 50% of total pay.
Maximum payable and tax-exempt: Rs 20 lakh (exemption is lifetime across employers, Section 19 of the Income-tax Act, 2025, earlier Section 10(10)).
Each completed year counts, and a final part-year of more than six months rounds up. The employer must pay within 30 days of gratuity becoming payable. Details and a fixed-term option are in the gratuity calculator.
4. Notice Period Shortfall Recovery
If you do not serve the full notice period and the employer has not formally waived the remaining days, the company deducts an equivalent amount from your FnF:
Some appointment letters specify basic salary as the basis. Use whichever your letter states.
5. Bonus and Incentives
Any statutory bonus under the Code on Wages, 2019 (for employees with wages up to Rs 21,000 a month; see the statutory bonus calculator) or discretionary bonus declared by the company and accrued up to your exit date must be included. Sales incentives earned before the exit date are also included.
6. Reimbursements
Pending claims for travel, medical, communication, or other approved expenses that have been incurred but not yet reimbursed are part of FnF earnings.
7. Other Deductions
These include outstanding advances or salary loans, asset recovery (e.g., laptop, uniform), and any other dues as specified in the employment contract. TDS on taxable portions of FnF components is also deducted at source and reflected in Form 16 / Form 12BA.
FnF Components at a Glance
| Component | Earnings / Deduction | Eligibility / Formula | Tax Status |
|---|---|---|---|
| Unpaid Salary | Earning | (Gross / 26 or 30) x days worked | Fully taxable as salary |
| Earned Leave Encashment | Earning | (Basic / 30) x unused EL days | Exempt up to least-of-four (max Rs 25 lakh lifetime) |
| Gratuity | Earning | 15/26 x wages x years (5 years; 1 year if fixed-term) | Exempt up to Rs 20 lakh lifetime |
| Bonus / Incentive | Earning | Per company policy or Code on Wages | Fully taxable |
| Reimbursements | Earning | Actual approved claims | Exempt if valid reimbursement |
| Notice Shortfall | Deduction | (Gross / 30) x unserved days | Tax treatment contested (see buyout page) |
| Advance / Loan Recovery | Deduction | Outstanding balance as per agreement | No tax impact |
Legal Timeline: The 2-Day Rule (Code on Wages, 2019)
Under Section 17(2) of the Code on Wages, 2019, which came into effect on 21 November 2025, wages due to an employee who is removed, dismissed, retrenched or resigns, or whose establishment closes, must be paid within two working days.
This replaced the earlier industry norm of 30 to 45 day settlement cycles. Gratuity is governed separately by the Code on Social Security, 2020, which allows up to 30 days. PF withdrawal follows EPFO timelines (typically 10 to 20 working days online).
Employers who miss the deadline can face a claim and penalties under the Code on Wages, 2019. Employees can file a claim with the authority under Section 45 of the Code.
How to Dispute an FnF Settlement
If you believe your FnF is incorrect, take these steps in order:
- Request a written FnF statement from HR showing each component, formula used, and deduction basis.
- Cross-check each number against your appointment letter, payslips, and leave records.
- Raise a written objection to HR and the Finance team within 7 days, citing the specific discrepancy.
- If unresolved, file a complaint under Section 45 of the Code on Wages, 2019 with the appropriate authority, or approach the Labour Commissioner's office.
Frequently Asked Questions
What is full and final settlement (FnF)?
Full and final settlement is the last payment an employer makes when you leave. It adds up salary for days worked in the last month, earned leave encashment, gratuity if eligible, pending bonus and reimbursements, then subtracts notice period shortfall, advances, asset recovery and TDS.
How many days does an employer have to pay FnF in 2026?
Under Section 17(2) of the Code on Wages, 2019 (in force from 21 November 2025), wages due on removal, dismissal, retrenchment or resignation must be paid within two working days. Gratuity has its own 30-day deadline under the Code on Social Security, 2020, and statutory bonus and PF follow their own timelines.
Am I eligible for gratuity if I served 4 years and 9 months?
Under the Code on Social Security, 2020 a permanent employee needs five years of continuous service. Some High Courts have counted four years plus 240 days worked in the fifth year as five years, but this is case law, not a rule in the Code, so ask HR how they apply it. Fixed-term employees qualify after one year.
Is leave encashment in FnF taxable?
At resignation or retirement, a private employee's leave encashment is exempt up to the least of the amount received, 25 lakh rupees (lifetime), 10 months' average salary and 30 days' salary per year of service minus leave taken. From 1 April 2026 this is in Section 19 of the Income-tax Act, 2025 (earlier Section 10(10AA)), under both tax regimes.
Can my employer deduct the notice shortfall from my FnF?
Yes, if your appointment letter sets a notice period and you leave without serving it or getting a written waiver. The usual recovery is monthly salary ÷ 30 × unserved days, on gross or basic as your letter states. CBIC Circular 178/10/2022-GST says no GST applies to this recovery.
What happens if my FnF payout is negative?
If deductions such as a large notice shortfall or an outstanding loan exceed your dues, the employer may ask you to pay the balance. You are liable only for what your contract and the law allow. Ask for a written statement and seek advice before paying a disputed amount.
Is gratuity taxable in FnF?
For non-government employees, gratuity is exempt up to 20 lakh rupees over your whole career, under Section 19 of the Income-tax Act, 2025 (earlier Section 10(10)). Anything above that is taxed as salary in the year you receive it. Government employees are fully exempt.
Sources
- Code on Wages, 2019 (full text; Section 17 on time of payment of wages)
- Code on Social Security, 2020 (full text; Chapter V on gratuity)
- PIB: Government makes the four Labour Codes effective (21 November 2025)
- Income-tax Act, 2025 as amended by Finance Act, 2026 (Section 19)
- CBIC Circular No. 178/10/2022-GST (notice pay recovery)
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Disclaimer: This tool is for informational purposes only and does not constitute legal or financial advice. It does not compute TDS. Consult a professional for specific situations.