Full and final settlement in India: timelines, components and common mistakes
For years, full and final settlement in most Indian companies followed internal policy: 30, 45 or even 60 days after the last working day was common. The labour codes have changed that. Under the Code on Wages, in force since 21 November 2025, wages owed to an employee who leaves must be paid within two working days.
This article explains what the rule covers, what a full and final settlement should include, how gratuity and leave encashment fit in, and the mistakes that most often lead to disputes.
The two working day rule
Section 17(2) of the Code on Wages requires wages to be paid within two working days when an employee has been removed, dismissed or retrenched, has resigned, or has become unemployed because the establishment closed.
The Code does not say exactly when the two days begin. The widely accepted reading is that the clock starts on the employee's last working day, since wages for the notice period are not earned until it is served. Until there is clear guidance or case law, plan your process so final wages can be paid within two working days of the last working day.
What a full and final settlement includes
Amounts payable to the employee
- Salary for days worked up to the last working day, including allowances
- Leave encashment for unused earned leave, as per law and your policy
- Bonus, incentives or variable pay that has already fallen due
- Pending reimbursements such as travel, mobile or medical
- Gratuity, if the employee is eligible
- Any other dues under the appointment letter or a settlement
Amounts that may be recovered
- Shortfall in notice period, if the contract allows recovery
- Outstanding loans or salary advances
- Company property not returned
Be careful with deductions. The Code on Wages lists the deductions an employer may make from wages. Some practitioners argue that recovery of unserved notice pay, joining bonuses or training bonds is not among them and should be pursued separately rather than deducted. Take advice before deducting large amounts.
Gratuity, leave encashment and PF
Gratuity
Gratuity has its own timeline under the Code on Social Security and is not part of the two day rule. It must be paid within 30 days of becoming payable. Permanent employees qualify after five years of continuous service. Fixed-term employees now qualify after one year.
Leave encashment
Under the OSH Code, wages in lieu of unused annual leave must be paid before the end of the second working day after a worker is discharged, dismissed or resigns. In practice, include leave encashment in the same two day settlement.
Provident Fund
PF accumulations are paid by EPFO, not by the employer. Your responsibility is to update the date of exit on the EPFO portal promptly and make sure all contributions up to the exit month have been deposited, so the employee can transfer or withdraw without delay.
Documents to hand over
- Relieving letter and experience or service certificate
- Full and final settlement statement showing every amount paid and recovered
- Payslip for the final month
- Form 16 for the financial year, issued after the year closes
A process that meets the deadline
Two working days is not enough time to start the settlement after the employee leaves. The work has to begin when the resignation or termination is confirmed.
- Day of resignation: confirm the last working day in writing and open the exit checklist
- During the notice period: collect clearances from IT, finance, admin and the manager, and calculate leave balance and recoveries
- One week before exit: prepare a draft settlement and share it with the employee for review
- Last working day: collect assets, finalise attendance and approve the settlement
- Within two working days: pay final wages and leave encashment, and issue the relieving letter
- Within 30 days: pay gratuity where applicable
Common mistakes
- Waiting for the next payroll cycle to pay the settlement
- Holding back the entire settlement because one clearance is pending
- Calculating leave encashment on basic pay alone when policy or law requires a wider wage base
- Forgetting that fixed-term employees may now be eligible for gratuity after one year
- Deducting amounts that are not permitted deductions under the Code on Wages
- Not updating the exit date with EPFO, which delays the employee's PF transfer
How SimplyHR can help
SimplyHR's payroll management team calculates full and final settlements and helps you meet the two working day requirement. Our HR operations support runs exit checklists and documentation, and our payroll software calculates final dues automatically from attendance and leave data.
This article is general information based on the labour codes and is not legal advice. Check the rules notified in your state before changing your process.