Full and Final Settlement in India (2026): The New 2-Day Rule, Calculation and Checklist

For years, Indian companies settled a leaving employee's dues "within 30 to 45 days", and nobody questioned it. That changed on 21 November 2025, when the labour codes came into force. Under the Code on Wages, the wages due to an employee who resigns, is dismissed, is retrenched or loses their job because the establishment closes must now be paid within two working days.

Two working days is not enough time to chase approvals over email, dig out leave balances from a spreadsheet and manually work out notice pay. This guide explains what full and final settlement (F&F) includes, the new timelines, how to calculate each component with a worked example, and a checklist to get F&F out on time, every time.

This is general guidance as of 30 September 2026, not legal advice. State rules, your contracts and your policies matter. Check your specific position with an employment lawyer or consultant.

The short answer

• Wages due on exit must be paid within 2 working days of the last working day (Code on Wages, section 17(2)). This applies to resignation, dismissal, removal, retrenchment and closure.
• "Wages" here broadly covers unpaid salary, leave encashment, bonus due and similar amounts. Payment terms for reimbursements are best settled in the same window.
• Gratuity has its own timeline: it's payable within 30 days of becoming due, for employees who qualify.
• PF and ESI don't get paid to the employee by you — you file the final month's contributions and mark the exit; the employee withdraws or transfers PF themselves.
• Documents — relieving letter, experience letter, Form 16 — should go out as promptly as possible.

What changed with the labour codes

	Before 21 November 2025	From 21 November 2025
Final wages on resignation	No fixed statutory deadline for most employees; common practice 30–45 days	Within 2 working days
Covered exits	Mostly retrenchment and dismissal under older laws	Resignation, dismissal, removal, retrenchment and closure
Gratuity eligibility	5 years of continuous service	5 years for permanent employees; 1 year for fixed-term employees
Gratuity payment	Within 30 days	Within 30 days

The practical meaning: F&F is now a two-day process, not a month-end process. If your F&F depends on the next payroll run, you're already late.

What's included in full and final settlement

Money owed to the employee:

1. Salary for the last month — up to and including the last working day.
2. Leave encashment — for earned or privilege leave, as per your leave policy and the applicable law.
3. Bonus — statutory bonus if the employee is covered, or performance bonus if it's due under their contract.
4. Notice pay — if the company ended employment without the full notice period.
5. Pending reimbursements — approved expense claims not yet paid.
6. Arrears — any increment or allowance due but not yet paid.
7. Gratuity — if eligible (paid within 30 days).

Money owed by the employee (recoveries):

1. Notice period shortfall — if the employee left without serving full notice and the contract allows recovery.
2. Salary advances or loans outstanding.
3. Unreturned assets — laptop, phone, ID card — only if your policy and contract permit a recovery.
4. Excess leave taken, if the policy allows adjusting it.

Statutory deductions — PF, ESI (if applicable), Professional Tax and TDS on the final amounts.

How to calculate each component

1. Last month's salary

Pay for the days worked up to the last working day. If an employee's monthly gross is ₹60,000 in a 30-day month and their last working day is the 18th:

₹60,000 × 18 ÷ 30 = ₹36,000

Deduct any unpaid leave within those 18 days.

2. Leave encashment

A common formula (check your policy):

Encashable earned leave × (basic + DA) ÷ 26

Some companies divide by 30 instead of 26. Whatever you use, apply it consistently and write it in the policy. For an employee with basic ₹30,000 and 12 days of earned leave:

12 × ₹30,000 ÷ 26 = ₹13,846

3. Notice pay (either way)

If the notice period is 60 days, the employee served 30, and the contract allows recovery of the shortfall:

Recovery = monthly basic (or gross, as per the contract) × 30 ÷ 30. For basic ₹30,000: ₹30,000.

If the company asked the employee to leave without serving notice, it pays notice pay instead. Many companies waive recovery when the employee is leaving on good terms — whatever you decide, record it.

4. Gratuity

Gratuity = last drawn (basic + DA) × 15 ÷ 26 × completed years of service

Service of more than six months in the final year counts as a full year. Gratuity is tax-free up to ₹20 lakh for most private-sector employees.

For an employee with basic ₹30,000 and 6 years 8 months of service (rounds to 7):

₹30,000 × 15 ÷ 26 × 7 = ₹1,21,154

A fixed-term employee now qualifies after one year of continuous service.

5. Reimbursements and bonus

Add approved but unpaid expense claims, and any bonus due for the period worked.

A complete worked example

Rahul resigns. His details:

• Monthly gross: ₹60,000 (basic ₹30,000)
• Last working day: 18 September (30-day month)
• Earned leave balance: 12 days
• Notice period: 60 days; served 30; contract allows recovery
• Approved expense claims pending: ₹4,200
• Service: 6 years 8 months
• Salary advance outstanding: ₹10,000

Payable within 2 working days:

Item	Amount
Salary, 1–18 September	₹36,000
Leave encashment (12 × 30,000 ÷ 26)	₹13,846
Pending reimbursements	₹4,200
Total earnings	₹54,046
Less: notice shortfall recovery	− ₹30,000
Less: salary advance	− ₹10,000
Less: employee PF on the salary earned (12% of basic for 18 days, ₹18,000)	− ₹2,160
Less: Professional Tax (varies by state)	− ₹200
Less: TDS (as applicable)	− as computed
Net payable	about ₹11,686, before TDS

Payable within 30 days: gratuity of ₹1,21,154.

The final PF contribution goes into that month's ECR with his date of exit; Rahul can then transfer or withdraw his PF himself using his UAN.

F&F for different types of exit

The components are the same, but the details change with the kind of exit:

Resignation. The most common case. The employee serves notice (or part of it), and recoveries for any shortfall depend on the contract. The 2-day clock starts from the last working day. Agree the last working day in writing when you accept the resignation, so there's no argument about when the clock started.

Termination for misconduct. Wages earned up to the last day must still be paid within two working days. Gratuity can be forfeited only in the specific situations the law allows, such as damage or loss caused to the employer, or certain kinds of misconduct — and only to the extent permitted. Document the process carefully.

Retrenchment or layoff. On top of the regular dues, retrenchment compensation is payable under the Industrial Relations Code, along with notice or pay in lieu of notice. Larger establishments need prior government permission for retrenchment. Take legal advice before you begin.

End of a fixed-term contract. Fixed-term employees now get the same benefits as permanent staff for the period worked, including gratuity after one year of continuous service. Plan their F&F in advance, because you know the end date from the start.

Death of an employee. Dues, gratuity and PF are paid to the nominee or legal heirs. Keep nominations up to date, and handle these cases with priority and care.

The two-day F&F checklist

Before the last working day

• Confirm the last working day in writing when you accept the resignation.
• Start clearances: assets, access, handover, pending expense claims.
• Freeze leave balance and attendance up to the last day.
• Agree notice pay or recovery, and any waiver, in writing.

On the last working day

• Collect company assets and record what's returned.
• Revoke system access.
• Finalise the settlement calculation and get approval.

Within 2 working days

• Pay the settlement by bank transfer.
• Share an F&F statement showing every earning and deduction.

Within 30 days

• Pay gratuity if due.
• Mark the exit date on the EPFO portal and include the final contribution in the ECR.
• Include the employee in the ESIC return for the month, with the last working day.

Afterwards

• Issue the relieving and experience letters.
• Issue Form 16 for the year after the financial year closes.

What to put in the F&F statement

A clear written statement prevents most F&F disputes. Share it with the employee along with the payment, and keep a signed or acknowledged copy. It should include:

• Employee details: name, employee code, designation, date of joining and last working day
• Exit type: resignation, termination, retrenchment, end of contract
• Notice period: required, served, and whether any shortfall was recovered or waived
• Earnings: salary for the final month (with days), leave encashment (with days and formula), bonus, reimbursements, arrears, notice pay
• Deductions: notice recovery, advances, asset recovery, PF, ESI, Professional Tax, TDS
• Net amount paid, the payment date and the bank reference
• Gratuity: the amount, calculation and expected payment date, if not paid with F&F
• PF and ESI: the final contribution month, the UAN and a note on how the employee can transfer or withdraw PF
• Documents: relieving letter, experience letter and when Form 16 will follow

Keep the calculations visible — not just the totals. An employee who can see "12 days × ₹30,000 ÷ 26 = ₹13,846" rarely argues about the number.

Common F&F mistakes

• Waiting for the monthly payroll run — the 2-day clock doesn't wait for payroll.
• Leave balances in a spreadsheet that nobody updated for months.
• Recovering notice pay the contract doesn't allow.
• Holding salary until assets are returned — handle assets separately under your policy.
• Forgetting pending expense claims.
• No written F&F statement — the most common cause of disputes.
• Not marking the exit on EPFO — it blocks the employee's PF transfer.

How PeopleVio supports exits and F&F

PeopleVio keeps the pieces of an exit in one place, so the two-day deadline is realistic:

• Resignations in the app — the employee submits, the admin approves with a last working day, and the history is recorded.
• Final salary prorated to the last working day — payroll pays only the days employed, and unpaid leave is deducted from attendance.
• Leave balances always current, because leave is applied and approved in the same system.
• Pending expense claims approved in the app are swept into the final payslip automatically.
• One-off earnings and deductions — leave encashment, notice pay or a recovery — are added as components in that month's payroll and appear on the payslip.
• Assets assigned to the employee are listed, so returns can be checked on the last day.
• PF and ESI for the exit month with the EPFO and ESIC modules — NCP days after the last working day in the ECR, and the last working day in the ESIC return.
• Form 16 generated from the year's payroll.

What PeopleVio doesn't do

• It doesn't calculate leave encashment, notice pay or gratuity for you. You work them out (using the formulas above) and add them to the final payroll as components.
• There's no separate F&F statement document yet — the final payslip shows every earning and deduction.
• It doesn't generate relieving or experience letters automatically.
• It doesn't mark the exit on the EPFO portal — you do that on the portal.

Frequently asked questions

What is the time limit for full and final settlement in India now? Wages due on exit must be paid within 2 working days under section 17(2) of the Code on Wages, in force from 21 November 2025. Gratuity has a separate 30-day limit.

Does the 2-day rule apply to resignations? Yes. It covers resignation, removal, dismissal, retrenchment and closure of the establishment.

Is gratuity part of the 2-day payment? No. Gratuity is payable within 30 days of becoming due.

How is leave encashment calculated in F&F? Commonly as encashable earned leave × (basic + DA) ÷ 26, but follow your leave policy and the applicable rules.

Can an employer hold F&F until the notice period is served or assets are returned? The 2-day rule applies to wages due. Recoveries for notice shortfall or assets should be handled as your contract and policy allow, but holding back all dues is risky. Take advice for your specific case.

Is a fixed-term employee entitled to gratuity? Yes, under the labour codes, after one year of continuous service.

Does PF get paid out as part of F&F? No. The employer deposits the final month's contribution; the employee withdraws or transfers PF through the EPFO using their UAN.

The bottom line

The labour codes turned full and final settlement from a month-long process into a two-day one. The companies that manage it without stress are the ones whose leave balances, attendance, expenses and payroll are already in one system — so the last working day triggers a calculation, not an investigation.

If F&F still means chasing spreadsheets in your company, see PeopleVio's pricing or talk to us and we'll show you an exit, start to finish, on your own data.

Related reading: Gratuity calculation in payroll software · CTC vs in-hand salary in 2026 · HR compliance checklist for small teams