When someone leaves a job, they should get all the money the company owes them. We call this a full and final settlement. It means the last payment the company makes to that person. This payment must be fair, complete, and follow the law.
If you own a small business in India, this guide will help you understand how full and final settlements work. We’ll keep it simple so you can handle this process with ease. No tricky words. Just plain talk.
Full and final settlement, Employee exit process, leave encashment payment, Legal compliance, Payroll adjustments, Automation tools
What Is a Full and Final Settlement? #
A full and final settlement is the last paycheck an employee gets after they leave the company. It includes unpaid salary, bonus, and money for unused leave. You must complete the process carefully and legally.
It doesn’t matter why they left. Whether you face resignation, termination, or retirement, you need this process. Giving the correct change shows respect and builds trust.
What Does a Settlement Include? #
A Full and Final Settlement (F&F Settlement) is the last payment an employee receives from their employer when leaving a job. It includes all outstanding dues, benefits, and necessary deductions to ensure a proper financial closure between both parties.
Let’s break down the key components of this settlement and explore what it covers.
Unpaid Salary
This includes the salary for the last working month or any previous months that were not paid yet. Employers usually calculate this based on:
- The number of days worked in the last month.
- Any pending adjustments for previous months.
- Salary components such as basic pay, dearness allowance, and other fixed earnings.
Example:
If an employee resigns on the 15th of the month, they will receive a salary for 15 days instead of the full month.
Leave Encashment
Employees are entitled to compensation for unused earned leave or privilege leave that has been accumulated over time. The rules for leave encashment vary by company policy, but generally, they follow this formula:
Leave Encashment = (Basic Salary + Dearness Allowance) × Number of Unused Leave Days ÷ 30
Example:
If an employee has 10 days of earned leave remaining and their basic salary + DA is ₹30,000 per month:
Leave Encashment = (30,000 ÷ 30) × 10 = ₹10,000
Not all leave types are encashable. Generally, earned/privilege leave can be encashed, while casual and sick leaves are not.
Bonuses & Incentives
If the employee is eligible for performance-based bonuses, annual bonuses, or any incentives, these are included in the settlement. However, the eligibility and payment depend on:
- Company policy on paying bonuses after resignation.
- Completion of the necessary duration in the company’s bonus cycle.
- Targets achieved during the service period.
Example:
If an employee was eligible for a quarterly performance bonus, they would receive a proportionate amount based on their tenure in the last quarter.
Legal Deductions
Certain deductions are applied to the final payment, which may include:
- Provident Fund (PF): A mandatory deduction as per EPF rules, unless exempted.
- Income Tax (TDS): TDS is deducted as per the applicable tax slab.
- Professional Tax: Applicable in some states.
- Loan & Advance Repayments: If the employee has taken a loan or salary advance, the remaining amount will be deducted from the final payout.
- Notice Period Recovery: If the employee leaves without serving the full notice period, the employer may deduct a portion of the salary in place of notice.
Why Legal Documents Matter #
Every full and final settlement should follow the law. In India, the Payment of Wages Act and other labor laws set the rules. You must provide proof of what you did.
Important documents to keep:
- Resignation letter
- Approval or acceptance of resignation
- Clearance form from departments
- Final payslip
- Payment confirmation
Tips for Legal Compliance:
- Keep a copy of all papers
- Follow the labor laws of your state
- Update your policies when laws change
How Long Does It Take? #
The law states that the parties must complete the full and final settlement 30 to 45 days after the last working day. Some companies try to finish it sooner, and that’s great!
Tips to be quick:
- Use reminders
- Set calendar alerts
- Stay in sync with your HR and accounts team
Why It’s Good for Your Business #
Doing full and final settlements the right way has significant advantages:
- You follow the law and avoid penalties
- Employees leave with a good feeling
- All accounts stay correct
- Builds your business’s image
Easy Steps to Finish a Settlement #
- Resignation Received: Get the letter and note the date.
- Check Notice Period: Confirm it was served or paid in lieu.
- Calculate Payments: Add all earnings, subtract deductions.
- Department Approvals: Check if company assets are returned.
- Inform the Employee: Share a pay breakdown.
- Make the Payment: Process via bank or verified method.
- Keep Documents: Keep everything on file.
Common Problems (and How to Fix Them) #
- Delays: Assign someone to track. Use apps or tools.
- Wrong Amounts: Use software or a calculator to ensure accuracy.
- Poor Communication: Send a clear breakdown of the payment.
Best Tips to Make It Simple #
- Have clear policies about exits.
- Review your exit processes often.
- Use payroll or exit software.
- Train the HR team.
- Get feedback from employees after they leave.
Real-Life Examples #
Employee Resigns After 3 Years of Service
Details:
- Last drawn monthly salary: ₹50,000
- Resigned on the 20th of the month (out of 30 days)
- 5 earned leave days pending
- Annual bonus of ₹60,000 (eligible for 50% based on policy)
- Provident Fund (PF) deduction at 12%
- Income Tax (TDS) applicable
- No loan or advance deductions
Settlement Calculation:
Unpaid Salary:
Salary for 20 days: (50,000 ÷ 30) × 20 = ₹33,333
Leave Encashment:
(Basic Salary + Dearness Allowance) × Leave Days ÷ 30
(40,000 × 5) ÷ 30 = ₹6,667
Bonus & Incentives:
50% of ₹60,000 bonus = ₹30,000
Provident Fund Deduction (12% of Basic Salary):
12% of ₹40,000 = ₹4,800 (employer contribution is separate)
Income Tax Deduction (10% TDS assumed):
10% of total earnings before deductions = ₹7,000
Final Payable Amount:
(33,333 + 6,667 + 30,000) – (4,800 + 7,000) = ₹58,200
FAQ’s: #
What does a full and final settlement include?
Unpaid wages, leave pay, bonuses, and deductions.
How long should it take?
Usually 30 to 45 days after the last day of work.
Can an employee ask questions about their settlement?
Yes. Employees can and should ask for details.
Can we change or discuss the terms?
Sometimes, if both sides agree.
Can technology help manage this better?
Yes. Tools make it easier and faster.
Conclusion #
A good full and final settlement shows your business cares. It keeps the law happy, the employees satisfied, and your books clean.
Whether someone leaves by choice or not, always treat them with fairness. Use tools that make this job simple.