Full and Final Settlement in India: Two-Day Deadline, Gratuity Formula and a Worked Example
How to calculate full and final settlement under the Labour Codes: pending salary, leave encashment, gratuity (15/26 formula), notice recovery and loan balances — with the two-working-day payment rule.
pagar karo Payroll Desk· Published 18 Jul 2026· Updated 28 Oct 2026· 3 min readFull and final settlement adds unpaid salary up to the last working day, leave encashment, gratuity (if eligible), bonus, arrears and pending reimbursements, then subtracts notice-period shortfall, loan and advance balances and asset recoveries. Under the Code on Wages, final wages must be paid within two working days of exit. Gratuity = 15 ÷ 26 × last drawn Basic + DA × completed years of service, payable after five years (one year for fixed-term staff), capped at ₹20 lakh.
- Deadline: two working days from the date of exit for wages.
- Gratuity: 15/26 × last drawn (Basic + DA) × years; a part year over six months counts as a full year.
- Fixed-term employees get pro-rata gratuity after one year.
- Recoveries (notice, loans, assets) must be in writing and itemised.
What goes into a full and final settlement
| Add | Subtract |
|---|---|
| Salary up to the last working day | Notice-period shortfall (if the policy allows recovery) |
| Leave encashment | Outstanding loans and advances |
| Gratuity (if eligible) | Unreturned assets (as agreed) |
| Bonus, incentives, arrears | PF, ESI, PT and TDS on the final salary |
| Approved reimbursements |
The two-working-day rule
The Code on Wages requires wages due to an employee who resigns, is removed, dismissed or retrenched to be paid within two working days. Plan the exit workflow so the settlement is ready on the last working day, not a month later.
Gratuity
- Eligibility: five years of continuous service for permanent employees (not required on death or disablement); one year for fixed-term employees under the Code on Social Security.
- Rounding: a final part year of more than six months counts as a full year.
- Ceiling: ₹20 lakh.
- Timeline: pay within 30 days of it becoming payable.
- Wages: from 21 November 2025, the Code wage definition (with the 50% add-back) applies.
Worked example
Priya resigns after 7 years 8 months. Last working day 20 October 2026. Monthly gross ₹50,000 with Basic + DA ₹30,000. 12 days of earned leave left. Notice served in full. Outstanding loan ₹18,000.
| Item | Amount (₹) |
|---|---|
| October salary: 50,000 × 20 ÷ 31 | 32,258 |
| Leave encashment: 12 × 50,000 ÷ 30 | 20,000 |
| Gratuity: 15 × 30,000 × 8 ÷ 26 | 1,38,462 |
| Less: loan balance | −18,000 |
| Less: PF, PT and TDS on final salary (illustrative) | −3,800 |
| Net settlement | 1,68,920 |
Your leave encashment base (gross or Basic) and month basis (30 or calendar days) come from your policy — use the same ones every time.
Documents to give
- F&F statement with every line itemised.
- Relieving and experience letter.
- Salary TDS certificate for the year.
- PF exit date updated so the employee can transfer or withdraw.
F&F in pagar karo
Start an exit from the staff profile and pagar karo works out the settlement as payroll would — unpaid months, encashment, gratuity, pending claims and arrears, minus notice shortfall, loans and asset recoveries. Adjust lines with reasons, send for approval, pay, and download the statement PDF. Staff access ends automatically on the exit date.
Frequently asked questions
What is the gratuity formula?
Gratuity = 15 × last drawn monthly wages (Basic + DA) × completed years of service ÷ 26. For ₹30,000 Basic + DA and 7 years 8 months (counted as 8 years), gratuity is 15 × 30,000 × 8 ÷ 26 = ₹1,38,462.
Within how many days must F&F be paid?
Under the Code on Wages, wages due on resignation, removal, dismissal or retrenchment must be paid within two working days. Gratuity has its own timeline — it must be paid within 30 days of becoming payable.
Can an employer hold F&F until the employee returns assets?
Employers usually deduct the value of unreturned assets or recover it under agreed terms, but should not delay wages beyond the legal deadline. Keep the recovery itemised in the statement.
This guide is general information for employers in India, checked against the sources above on 28 Oct 2026. Rules and rates change — confirm with your CA or the official notification before acting.