Full and final settlement: a checklist of what to include

A full and final settlement pays the employee everything owed and recovers everything owed back: salary up to the last working day, leave encashment, gratuity and any bonus, minus notice-period shortfall, loans, advances and unreturned assets, with tax deducted on the total.

Amounts owed to the employee

• Salary for the days worked in the last month, pro-rated to the last working day.
• Encashment of leave balances, for leave types your policy allows to be encashed.
• Gratuity, if the employee has completed five years of continuous service (one year for a fixed-term employee, or on death or disablement), calculated on wages that are at least half of total remuneration under the Code on Social Security.
• Bonus, incentives or variable pay earned but not yet paid, pro-rated as your policy states.
• Approved expense reimbursements that have not yet been paid.

Amounts recovered from the employee

• Notice-period shortfall: pay in lieu for the days of the contractual notice not served, unless waived.
• Outstanding salary advances and loan balances.
• Unreturned company assets, valued per your asset policy.
• Any excess leave taken beyond the earned balance, where policy allows a recovery.

Tax

The settlement is part of the employee’s income for the year. TDS should be recomputed on the year’s total income — salary already paid plus the settlement — rather than applying a flat rate to the final amount. Leave encashment and gratuity have their own exemption rules, so they must be tracked as separate components.

The process around the numbers

1. Confirm the last working day, including any notice waiver or extension.
2. Collect clearances from IT, finance, admin and the reporting manager, including asset return.
3. Compute the settlement and have HR and finance review it before approval.
4. Pay it, and issue the settlement statement, relieving letter and experience letter.
5. Provide the employee their TDS certificate (Form 16 for FY 2025-26 and earlier, Form 130 from tax year 2026-27) and tell them how to transfer or withdraw their PF through the EPFO portal.

Why settlements get delayed

Almost always because one input lives somewhere else: a leave balance in a spreadsheet, an asset in IT’s register, a loan in finance’s ledger. When these sit in one system, the settlement can be drafted automatically the moment clearance is complete and reviewed rather than assembled.

Statutory rates, ceilings and due dates are revised by government notification. The figures here were accurate at the time of writing — confirm against the official source (EPFO, ESIC, your state labour department or the Income Tax Department) before relying on them for a filing.

Frequently asked questions

What is included in a full and final settlement?

Pending salary, leave encashment, gratuity and bonus owed to the employee, less notice-period shortfall, loans, advances and asset recoveries, with tax deducted on the total.

How is notice-period shortfall recovered?

Typically as salary for the unserved notice days, calculated at the contractual rate, unless the employer waives the notice period.

Is TDS applied to the full and final settlement?

Yes. It is part of the year’s income, so TDS is recomputed on total income for the year, with separate exemption treatment for items such as gratuity and leave encashment.