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Free HR resource · Offboarding
A full and final settlement (FnF) closes an employee’s account on exit. It adds up what you owe — unpaid salary, leave encashment, gratuity where due, and any bonus or reimbursements — and deducts recoveries such as notice shortfall, advances, unreturned assets and TDS. The net is paid, and the employee confirms no further claims. Use the components, worked example and statement format below.
The short answer
Compute both sides carefully, share a clear statement, and settle within a reasonable window — most employers aim for 30 to 45 days of the last working day. Handle it as part of a complete employee exit checklist.
The payables side totals everything the employee has earned but not yet received. These five items cover almost every settlement.
Salary and allowances earned up to the last working day but not yet paid, including any pending arrears.
Payment for the balance of earned/privilege leave the employee has not used, as per your leave policy.
Payable where the employee has completed five years of continuous service, under the Payment of Gratuity Act.
Any statutory bonus or performance/variable pay that has accrued and is due for the period worked.
Approved but unpaid expense claims — travel, mobile, or other reimbursements owed to the employee.
The deductions side nets off genuine, documented recoveries. Keep each one clear on the statement so the employee can see how the final figure was reached.
Where the employee serves short notice, the shortfall may be recovered as your appointment letter provides.
Any outstanding salary advance or company loan balance is recovered from the settlement.
The value of company assets not returned — laptop, phone, access cards — may be recovered.
Tax deducted at source on the taxable portion of the settlement, in line with the employee’s income for the year.
An employee leaves with ₹40,000 of unpaid salary, ₹28,000 of leave encashment and ₹12,000 of pending reimbursements, but owes a ₹15,000 salary advance and ₹8,000 of TDS:
Gross payables
Total recoveries
Net settlement payable
₹40,000 + ₹28,000 + ₹12,000 = ₹80,000 payables; ₹15,000 + ₹8,000 = ₹23,000 recoveries; net ₹57,000. Gratuity would be added on top where five years of service is complete — size it with the gratuity calculator.
A simple statement you can adapt in your payroll system. Fill the figures, share it with the employee, and keep a signed copy on file.
Full and final settlement (FnF) is the closing of accounts when an employee leaves. It totals everything the employer owes — unpaid salary, leave encashment, gratuity where due, and any bonus or reimbursements — and deducts recoveries such as notice-period shortfall, advances, unreturned assets and TDS. The net amount is paid to the employee, who confirms they have no further claims.
The payables side includes unpaid salary up to the last working day, encashment of unused earned leave, gratuity if five years of service is complete, any statutory bonus or variable pay, and pending reimbursements. The deductions side includes notice-period recovery, outstanding advances or loans, the value of unreturned assets, and TDS. The net figure is the settlement payable.
There is no single national deadline in force today, and many employers settle within 30 to 45 days of the last working day. The Code on Wages, 2019 proposes that wages be paid within two working days of an employee’s removal, dismissal or resignation once it is notified. Until then, follow your appointment letter and internal policy, and settle promptly to protect your employer brand.
Leave encashment on retirement or resignation is taxable as salary, subject to the exemptions available under the Income-tax Act — the rules and limits differ for government and non-government employees. Because the tax treatment depends on the employee’s situation, compute TDS on the settlement carefully and take advice where the amounts are large.
An employer should not withhold legitimately-due amounts, and gratuity in particular can only be withheld in narrow cases such as termination for proven misconduct causing loss. Genuine, documented recoveries — a notice-period shortfall or an unreturned laptop — can be netted off, but blanket withholding of dues invites disputes. Settle what is owed and record any deductions clearly.
General guidance, not legal or tax advice. Confirm settlement timelines, tax treatment and statutory steps for your state and establishment type.
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