# Full and final settlement: rules and checklist | Peoplo.ai

URL: https://peoplo.ai/in/en/compliance/full-and-final-settlement/

> Full and final settlement in India: what it includes, wages within two working days under the Code on Wages, gratuity in 30 days and a worked example.

People, companies and figures in product examples on this page are sample data, not customers.

[India compliance guide](https://peoplo.ai/in/en/compliance/)

India compliance guide

# Full and final settlement in India

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.

Work out the figures for your own case with the [leave encashment calculator](https://peoplo.ai/in/en/tools/leave-encashment-calculator/) and the [gratuity calculator](https://peoplo.ai/in/en/tools/gratuity-calculator/) . The [gratuity formula guide](https://peoplo.ai/in/en/blog/gratuity-calculation-formula/) explains the 15/26 rule and eligibility.

## What is the checklist for a full and final settlement?

Two working days is too short to start on the last day. Work backwards from it.

1. When notice is given

Confirm the last working day in writing, and any notice buyout or waiver.

Start the asset return list: laptop, ID card, access cards and anything else issued.

Ask the employee to submit pending claims and tax proofs.

2. A week before the last day

Freeze the leave balance and work out leave encashment.

Check gratuity eligibility and the amount.

Collect sign-offs from finance, IT and the manager on any recoveries.

3. On the last day

Record returned assets and turn off system access.

Finalise attendance for the month.

Prepare the settlement statement for approval.

4. Within two working days

Pay the settlement, with a statement of every line.

Issue the relieving and experience letters.

Update the exit date with EPFO so the employee can withdraw or transfer PF.

5. Within 30 days

Pay gratuity, if the employee qualifies.

More on the two-day rule in [Full and final settlement in two working days](https://peoplo.ai/in/en/blog/full-and-final-settlement-two-working-days/) .

## How does Peoplo.ai prepare a full and final settlement?

The [exit coordinator agent](https://peoplo.ai/in/en/ai-agents/) 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.

[Request a demo](https://peoplo.ai/contact/) [Onboarding and exits](https://peoplo.ai/in/en/platform/onboarding-exits/)

Sources · checked 3 November 2026

- [The Code on Wages, 2019, section 17(2): Gazette of India, 8 August 2019 (checked 3 November 2026)](https://egazette.gov.in/WriteReadData/2019/210356.pdf)
- [LiveLaw: two working days under the Code on Wages](https://www.livelaw.in/articles/two-working-days-code-wages-employee-final-settlement-552780)
- [India Code: Code on Social Security, 2020 (gratuity, section 53)](https://www.indiacode.nic.in/bitstream/123456789/16823/1/aA2020-36.pdf)
- [Labour Law Reporter: gratuity under the labour codes](https://labourlawreporter.com/gratuity.asp)
- [Income Tax Department: Income-tax Act 2025, section 19 (table, serial numbers 13 and 14)](https://wm.incometaxindia.gov.in/web/guest/w/section-19-199)
- [Income Tax Department: Notification 31/2023, ₹25 lakh limit for leave encashment](https://wm.incometaxindia.gov.in/web/guest/w/notification-no.-31/2023-f.-no.-200/3/2023-ita-i-/-so-2276-e-)

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.