Full and final settlement in India: what goes in it and how fast it has to be paid

The full and final settlement is the last payslip an employee receives from you, and often the one they read most carefully. It pulls together pay, leave, gratuity, reimbursements and recoveries, and it has to be right the first time because there is no next month to correct it in.

The deadline changed

Many companies used to settle in 30 to 45 days, after the next payroll cycle. The Code on Wages, in force since November 2025, requires wages due to an employee who resigns, is dismissed or is retrenched to be paid within two working days of their last day. That turns the settlement from a month end task into something that has to be ready before the employee leaves.

What goes into the settlement

• Salary for days worked in the final month, prorated on the same day count your payroll uses for joiners.
• Leave encashment for earned leave that can be encashed under your policy.
• Gratuity, if the employee is eligible.
• Statutory bonus and any variable pay or incentive that has been earned.
• Approved expense claims not yet reimbursed.
• Less recoveries: notice period shortfall, outstanding advances and loans, and the value of unreturned assets where your policy allows.
• Less statutory deductions: PF, ESI where applicable, professional tax and TDS recalculated for the final month.

Gratuity

Gratuity is payable to permanent employees after five years of continuous service. Under the Code on Social Security, fixed term employees qualify after one year. The formula is 15 days of last drawn wages for each completed year, using a 26 day month: last drawn wages multiplied by 15, divided by 26, multiplied by years of service. Service of more than six months in the final year counts as a full year.

Last drawn wages means basic pay plus dearness allowance, under the labour code definition. If allowances make up more than half of total pay, the excess is added back, which raises the gratuity due. Tax free gratuity is capped at ₹20 lakh across a working life.

Leave encashment

Encashment is usually calculated on basic pay, or basic plus DA, for each day of unused earned leave, divided by the same day count your policy uses. On retirement or resignation, encashment for non government employees is tax free up to ₹25 lakh, subject to the conditions in the tax law. Encashment while still in service is fully taxable.

Leave balances are where most settlement disputes start. If accruals were adjusted by hand during the year, the employee's own record of their balance will often disagree with yours. Accruals driven from attendance, with a visible history, avoid that conversation.

Recoveries

Recoveries are only defensible if they are written into the appointment letter or policy the employee accepted. Notice shortfall is usually recovered at basic pay or gross pay per day, as the contract says. Asset recovery should name the item, its value and how that value was set. Every recovery should appear as its own line, not netted into another figure.

Running a settlement in two working days

1. 1.Start when the resignation is accepted, not on the last day. Lock the last working day on the employee record.
2. 2.Collect clearances in parallel: asset returns, open expense claims, loans and advances.
3. 3.Calculate the settlement before the last day, with leave balances projected to the last day.
4. 4.Have it reviewed and approved like a pay run, with each line traceable to its source.
5. 5.Pay it, issue the settlement statement, and generate the relieving and experience letters.
6. 6.Process PF exit and transfer requests, and issue the final tax certificate after year end.

How PayLoom does it

In PayLoom a leaving date on the employee record starts the settlement. Leave reads the balance to the last day, Assets lists what still has to come back, Expenses lists open claims, and Payroll builds the settlement from all of them with each line showing where it came from. It is reviewed and approved like any other run, so it can be paid inside the deadline.