Full and Final Settlement in India has changed completely — and most HR managers don’t even know it yet.
So, your employee has resigned. Or maybe you had to let someone go.
Either way, now comes the most crucial part that most HR managers have to do. Full and Final Settlement. The FnF process.
And if you’re still doing this manually, calculating everything in Excel, follow ups with departments for clearances, praying you didn’t miss anything! Believe me, I understand the stress. But here’s the thing. The rules have changed and if you haven’t updated your FnF process yet, your company could already be non-compliant.
Let me walk you through everything you need to know about the new rules, what’s included in FnF, how to calculate it, and a simple checklist so nothing fears you.
New Labor Codes 2025
Let’s check the updates first.
India’s new Labour Codes came into effect on 21st November 2025. These codes consolidated 29 older labour laws into 4 simplified laws. And one of the biggest changes? The Full and Final Settlement timeline.
Under the old system: Companies used to take 30, 45, sometimes even 60-90 days to clear FnF dues. It was painful for employees but widely accepted. Under the new rules: As per Section 17(2) of the Code on Wages, 2019 — all dues must now be cleared within 2 working days of the employee’s last working day. Yes. 2 working days. Not 30. Not 45. Two.
This applies to all types of exits, resignation, termination, retrenchment, retirement, or even closure of establishment. And this is not a suggestion or option. It’s the law. Delay it, and your company is legally non-compliant. Believe me, most HR managers in India still don’t know about this rule.
And most of the companies are still following the old 30–45-day practice. You don’t be one of them.
What Exactly is Full and Final Settlement in India?
Full and Final Settlement (also called FnF or F&F settlement) it is the process of calculating and clearing all financial dues between an employer and an employee when employment ends.
It is not just the last month’s salary. It is a complete financial closure where everything the company owes the employee; minus everything the employee owes the company. And it applies to every employee, whether they resigned, were terminated, retired, or the company shut down.
What is Included in Full and Final Settlement in India?
This is the most crucial part where most companies make mistakes. They either forget components or calculate them wrong.
Here’s everything that you need to know about FnF process:
What You Pay the Employee (Credits):
1. Unpaid Salary – Salary for the days worked in the final month up to the last working day.
You can calculate like this:
Unpaid Salary = (Gross Monthly Salary ÷ 26) × Days Worked
2. Leave Encashment – This means payment for unused earned leave or privilege leave at the time of exit.
(Formula: Leave Encashment = (Basic Salary ÷ 30) × Unused Earned Leave Days)
Important — always use the final salary for this calculation. Not the joining salary. Not last year’s salary. The final salary. This is one of the most common mistakes that companies make, and employees have every right to dispute it.
3. Gratuity – Payable when the employee has completed 5 or more years of continuous service. Must be paid within 30 days of exit — separate from the 2-day FnF deadline.
(Formula: Gratuity = (Last Drawn Basic + DA) × 15 × Years of Service ÷ 26)
Gratuity is tax-exempt up to ₹20 lakhs for non-government employees.
4. Bonus – If the employee was part of any performance bonus cycle — they deserve their proportional share. For example, if the bonus cycle is April to March and they left in November — they worked 8 months, so they get 8 months’ share. Don’t skip this. It’s their right.
5. Pending Reimbursements – Check if any travel bills, mobile bills, or expense claims are still sitting in the system unapproved. These need to be cleared before FnF — not after.
6. Notice Period Pay (if applicable) – If your company decided to waive the notice period and let the employee leave early — then you owe them salary for those remaining days. Simple as that.
Deductions
1. Notice Period – If your notice period policy says 60 days but the employee served only 30 — you can recover 30 days salary. Just make sure this was clearly mentioned in their offer letter. Verbal policies don’t hold up well in disputes.
(Use this formula: Deduction = (Monthly Salary ÷ 26) × Unserved Notice Period Days)
2. Salary Advances / Loans – Any pending loan or salary advance that hasn’t been fully recovered yet — deduct the outstanding balance. Keep the paperwork ready in case the employee questions it.
3. TDS (Tax Deducted at Source) – This one is honestly the most skipped step in small businesses. TDS must be deducted on the total FnF amount based on the employee’s tax slab. Skip it — and you’ll hear from the Income Tax department later. Not a fun conversation.
4. Asset Recovery – If there is any Laptop, SIM card, access card, uniform are issued by the company and any of these assets not returned.
The Final Formula:
Net FnF = (Unpaid Salary + Leave Encashment + Gratuity + Bonus + Reimbursements) − (Notice Shortfall + Loan Recovery + TDS + Asset Deductions).
Full and Final Settlement Checklist for HR Managers
You can use this checklist every single time, so you don’t face any trouble.
Before Last Working Day:
- Resignation received in writing
- Last working day confirmed
- Notice period dates calculated
- All department clearances initiated in parallel
- Leave balance verified in system
- Pending reimbursements collected and approved
- Loans/advances balance confirmed with Finance
- Assets list prepared (laptop, phone, SIM, ID card)
On Last Working Day:
- All asset handovers completed
- All department clearances received
- FnF calculation prepared (using final salary)
- TDS calculated correctly
- FnF statement prepared and shared with employee
- Employee signs acknowledgment
Within 2 Working Days:
- Net FnF amount transferred to employee bank account
- FnF settlement letter issued
- Relieving letter issued
- Experience certificate issued
Within 30 Days:
- Gratuity paid (if applicable)
- PF transfer/withdrawal initiated on EPFO portal
PF transfer or withdrawal is processed via the EPFO portal
Year End:
- Form 16 issued
What Happens If You Miss the 2-Day Deadline?
Honestly friends, this is the question most HR managers are asking right now. Under the new Labor Codes, delaying FnF settlement is a legal violation. The employee can file a complaint with the state Labor Department under Section 17(2) of the Code on Wages.
The company can face:
- Penalties
- Legal notices
- Reputation damage — especially on platforms like Glassdoor and LinkedIn And other social media platforms too.
So, the 2-day deadline is not something that you can take it lightly.
How HR Software Makes FnF 10x Easier?
I know that doing all of this manually in 2 working days is extremely difficult, when you have other stuffs to do. You can automate this process and free yourself from hours of calculations and follow ups. This is exactly the reason why companies using HRMS software that handle FnF settlements smoothly, quickly than those doing it manually.
With Runtime HRMS:
- Leave balances are always up to date — no manual checking needed.
- Salary components and structure are already in the system — no recalculation required
- FnF calculation is also automated
- Clearance workflows can be set up in the system — all departments notified automatically
- FnF statement is generated in one click — professional format, itemized
- Relieving letters and experience certificates can be generated instantly
You don’t miss anything. You don’t calculate wrong. And you meet the 2-day deadline without any hassle.
👉 Book a Demo — See How Runtime HRMS Handles FnF →
What to Remember
New Labour Codes came into effect on November 21, 2025 —
- FnF must now be completed within 2 working days. No more 30-45 day delays.
- FnF includes unpaid salary, leave encashment, gratuity, bonus, and reimbursements.
- Deductions include notice shortfall, pending loans, and TDS.
- And always — always — calculate everything on the final drawn salary, not old salary.
- Gratuity has its own 30-day deadline. PF follows EPFO timelines. But salary and wage components — 2 working days. That’s the law now.