A full and final settlement is the last payment to an employee who leaves: salary for the days worked, leave encashment, dues and reimbursements, minus recoveries such as notice pay and loans. Under the Code on Wages, in force since 21 November 2025, wages due must be paid within two working days of the exit. Gratuity follows within 30 days.
What is included in a full and final settlement?
Paid to the employee
Salary for the days worked in the last month
Leave encashment for unused earned leave, as your policy or state law provides
Bonus or incentives that have fallen due
Pending reimbursements and approved expense claims
Notice pay, if the company asked the employee to leave early
Recovered from it
Notice pay shortfall, if notice was not served
Outstanding loans, advances and salary paid in advance
Value of company assets not returned, where your policy allows it
Income tax for the year, recalculated on final earnings
Gratuity is paid on top, on its own deadline. PF is not part of the settlement: the employee withdraws or transfers it once the exit date is updated with EPFO.
When must a full and final settlement be paid?
What
Deadline
Law
Wages due (salary and other wage items)
2 working days from the exit
Code on Wages, 2019, section 17(2)
Gratuity
30 days from becoming payable
Code on Social Security, 2020
The two-day rule covers an employee who resigns, is removed, dismissed or retrenched, or loses the job because the establishment closes. Resignation is new: the old Payment of Wages Act applied the rule only when the employer ended the job. The days are usually read as running from the last working day, not the date of the resignation letter.
The rule applies to wages as the Code defines them. Gratuity, statutory bonus, retrenchment compensation and reimbursement of special expenses are outside that definition. Whether leave encashment counts is not settled; check with your adviser before paying it later than the final salary.
How do you calculate a full and final settlement?
An example. Priya resigns after 6 years and 4 months. Her last day is the 25th of a 30-day month. Monthly gross is ₹60,000, of which basic plus DA is ₹30,000. She has 12 days of earned leave, an approved claim of ₹4,500, served her notice 10 days short, and owes ₹15,000 on a salary advance.
Line
Working
Amount
Salary for 25 days worked
₹60,000 ÷ 30 × 25
+ ₹50,000
Leave encashment, 12 days
₹30,000 basic plus DA ÷ 30 × 12
+ ₹12,000
Pending expense claims
Approved before the last day
+ ₹4,500
Notice pay recovery, 10 days short
₹60,000 ÷ 30 × 10
− ₹20,000
Salary advance outstanding
From the loan record
− ₹15,000
Settlement before TDS, due within 2 working days
₹31,500
Gratuity, due within 30 days
15 ÷ 26 × ₹30,000 × 6 years
₹1,03,846
TDS is then recalculated for the year on her final earnings. The 4 months count as service but not as a year, because only a final part year of more than six months rounds up. All ₹12,000 of the leave encashment is tax-free here, as it is within all four exemption limits. Some companies encash leave on gross pay or divide by 26; follow your policy.
How does Peoplo.ai prepare a full and final settlement?
The exit coordinator agent starts when a resignation comes in or a last day is set. It reads monthly gross from payroll, counts encashable leave, checks which IT assets are still assigned, works out the settlement and drafts the relieving and experience letters. The settlement waits for a person to approve it. The agent never pays a settlement or turns off access on its own.
The exit itself runs as a checklist: assets, handover, access, final timesheet, exit interview and finance no-dues. An exit can’t be completed while IT assets are still assigned, so nothing is missed in the rush of the last two days.
See an exit prepared for approval
Hiring, onboarding and exits are included in every Peoplo.ai plan.
General information, not legal or tax advice. State rules and your company policy can add to these steps.
Questions
Frequently asked questions
Short answers about full and final settlement in India.
What is full and final settlement?
The last payment to an employee who leaves. It adds salary for the days worked, leave encashment, dues and pending reimbursements, and takes away recoveries such as notice pay shortfall, loans and advances, and income tax. Under the Code on Wages, wages due must be paid within two working days of the exit.
Is full and final settlement mandatory within 2 days?
For wages, yes. Section 17(2) of the Code on Wages, in force since 21 November 2025, says wages due to an employee who resigns, is removed, dismissed or retrenched must be paid within two working days. It covers resignations, which the old Payment of Wages Act did not. Gratuity has its own 30-day deadline.
Is gratuity part of the two-day settlement?
No. Gratuity is not counted as wages for the two-day rule. Under the Code on Social Security, 2020, the employer pays it within 30 days of it becoming payable, and a delay attracts interest. Employees qualify after 5 years of continuous service, or 1 year on a fixed-term contract.
Does leave encashment have to be paid within two working days?
It is not on the list of items excluded from wages, but whether it counts as wages for the two-day rule is not settled. Check with your adviser before paying it later than the final salary.
Is full and final settlement taxable?
Salary and notice pay are taxed as salary, and TDS for the year is recalculated on the final earnings. Leave encashment at exit is tax-free for a non-government employee up to the least of four limits, with a lifetime cap of ₹25,00,000. Gratuity has its own exemption.
How does Peoplo.ai help with full and final settlement?
The exit coordinator agent starts when a resignation comes in or a last day is set. It reads monthly gross from payroll, counts encashable leave, checks IT assets still assigned, works out the settlement and drafts the relieving and experience letters. A person approves the settlement; the agent never pays it or revokes access on its own.
