Full and final settlement in India: what to include and how to calculate it
Pending salary, leave encashment, gratuity, notice pay and recoveries - a checklist for settling an employee who is leaving, with worked formulas.
The full and final settlement (F&F) is the last thing an employee remembers about you. Get it right and on time.
What goes into it
| Payable to the employee | Recovered from the employee |
|---|---|
| Salary for days worked in the last month | Notice period shortfall, if not waived |
| Leave encashment for eligible leave | Outstanding loans and advances |
| Gratuity, if eligible | Unreturned company assets, as per policy |
| Pending reimbursements and bonus | Excess leave taken, if your policy says so |
Gratuity
Under the Payment of Gratuity Act, employees with five or more years of continuous service are generally eligible. For employers covered by the Act, the usual formula is:
Gratuity = last drawn (basic + DA) × 15 ÷ 26 × completed years of service
A part year of more than six months is normally counted as a full year. Gratuity is subject to a statutory ceiling, so check the current limit.
Leave encashment
Encashment = eligible leave days × (monthly basic ÷ 26) - or ÷ 30, depending on your policy. State the divisor and the pay elements in your leave policy.
Notice period
If the employee leaves before serving their notice, recover the shortfall at their daily rate unless the manager waives it. Record the decision either way.
The process
- Resignation accepted, last working day fixed.
- Exit checklist: assets returned, handover done, access removed.
- F&F calculated and checked by a second person.
- Paid with the statement, followed by the relieving and experience letters.
- PF exit date updated and Form 16 issued with the year's other employees.
Many state laws and the new labour codes expect final dues to be paid within a short time after exit. Check the timeline that applies to your business and aim to finish well inside it.