Quick answer: For HR, full and final (F&F) settlement has four parts: (1) confirm the last working day and complete exit clearance; (2) calculate dues (salary to the last day, leave encashment, gratuity, bonus, reimbursements) and recoveries (PF, PT, TDS, advances, notice pay within legal limits); (3) pay wages due within two working days of the exit and gratuity within 30 days; (4) issue the F&F settlement letter, relieving and experience letters, update the PF exit date, and include the payment in the month's PF, PT and TDS filings.
An exit is often the last impression an employee has of the company, and the F&F settlement is where most disputes arise: late payment, unexplained deductions, missing gratuity or a PF exit date that was never updated. This guide is for HR and payroll teams. It sets out the F&F process and timeline, a checklist, the settlement statement format with a worked example, a letter format you can adapt, and the tax and statutory treatment of each component. For what an employee is owed, see our full and final settlement guide, and for the amounts, the F&F settlement calculator.
F&F settlement timeline
| Step | When |
|---|---|
| Resignation accepted; last working day confirmed in writing | Start of notice period |
| Exit clearance (assets, handover, dues) completed | Before or on the last working day |
| Wages due paid | Within two working days of the last working day (Code on Wages) |
| Gratuity paid, if eligible | Within 30 days of becoming payable |
| F&F settlement letter, relieving letter and experience letter issued | With or soon after payment |
| Date of exit marked on the EPFO portal | After the last PF contribution is deposited |
| F&F included in PF ECR, PT and TDS deposits | With the month's filings |
| Form 130 issued for the tax year | By 15 June after the tax year |
The two-working-day rule applies to wages; exit clearance must not be used to hold them back. Use our notice period calculator to confirm the last working day.
F&F settlement process: step by step
- Confirm the exit: resignation or termination letter, acceptance, notice period served or waived, and last working day.
- Start clearance: IT, admin, finance and the manager confirm assets returned, handover done and any recoverable amounts.
- Calculate dues: salary to the last day, leave encashment as per policy, gratuity if eligible, pro-rata bonus or incentives due, pending reimbursements.
- Calculate recoveries: PF and ESI on wages, professional tax, TDS, outstanding advances or loans, keeping deductions from wages within legal limits; recover any notice-pay shortfall from non-wage dues with written consent.
- Approve and pay: get the F&F statement approved and pay through an off-cycle payroll if the regular pay date is too late.
- Issue documents: F&F letter with the statement, relieving letter, experience letter, and payslip.
- Close statutory records: mark the PF exit date, include the payment in ECR, ESI, PT and TDS filings, and keep the F&F file for records.
F&F checklist for HR
- ☐ Resignation or termination letter and acceptance on file; last working day agreed.
- ☐ Notice period: served, waived in writing, or shortfall recovery agreed.
- ☐ Assets returned: laptop, ID card, access cards, documents.
- ☐ Attendance and leave balance confirmed up to the last day.
- ☐ Salary for the last month, arrears and pending reimbursements calculated.
- ☐ Leave encashment calculated as per policy.
- ☐ Gratuity eligibility checked (five years' continuous service, or one year for fixed-term employees; not required on death or disablement) and amount calculated.
- ☐ Bonus or incentive due for the period calculated.
- ☐ PF, ESI, PT and TDS on the final payment calculated; tax exemptions applied where available.
- ☐ Outstanding advances and loans recovered within deduction limits.
- ☐ Statement approved; payment made within two working days for wages.
- ☐ F&F letter, relieving letter, experience letter and payslip issued.
- ☐ PF date of exit marked; employee told how to withdraw or transfer PF.
- ☐ Access to systems removed; employee removed from the next regular payroll.
Full and final settlement format (statement)
Priya resigns, and her last working day is 20 November 2026 after six years and two months' service. Her salary is ₹45,000 a month (basic ₹22,500, HRA ₹9,000, special allowance ₹13,500). She has 12 days' earned leave and an outstanding advance of ₹5,000. Her F&F statement:
| Particulars | Amount (₹) |
|---|---|
| Earnings | |
| Salary, 1–20 November (₹45,000 × 20 ÷ 30) | 30,000 |
| Leave encashment, 12 days on basic (₹22,500 ÷ 30 × 12) | 9,000 |
| Gratuity (₹36,000 × 15 ÷ 26 × 6 years) | 1,24,615 |
| Total earnings | 1,63,615 |
| Deductions | |
| Employee PF (12% of wages ₹24,000) | 2,880 |
| Professional tax | 200 |
| TDS (as per annual projection) | 2,000 |
| Advance recovery | 5,000 |
| Total deductions | 10,080 |
| Net amount payable | 1,53,535 |
Notes: wages for PF and gratuity follow the Labour Codes definition (gross less HRA here, as HRA is under 50% of pay): ₹36,000 a month, and ₹24,000 for the 20 days. Gratuity uses 15 days' wages for each completed year; the extra two months do not count as a year. The leave encashment basis is the company's policy. Deductions from wages (PF, PT, TDS and the advance) stay within the Code on Wages limit of 50% of wages. Check the amounts with our gratuity and leave encashment calculators.
F&F settlement letter format
[Company letterhead]
Date: [date]
Ref: [reference number]
To
[Employee name]
Employee ID: [ID]
[Address]
Subject: Full and final settlement
Dear [Name],
This refers to your [resignation/termination/retirement] dated [date], accepted with your last working day as [date]. Your full and final settlement has been completed as per the statement attached, which shows all amounts payable to you and all deductions.
The net amount of ₹[amount] has been credited to your bank account [last 4 digits] on [date] by [mode of payment]. Your provident fund contributions have been deposited up to [month], and your date of exit [has been/will be] updated on the EPFO portal. Your Form 130 for the tax year will be issued by 15 June [year].
If you have any query about this settlement, contact [name, e-mail].
We thank you for your contribution and wish you success.
For [Company Name]
[Authorised signatory, designation]
Enclosure: F&F statement
Some companies ask the employee to sign an acknowledgement of receipt. An acknowledgement confirms what was received; it does not take away any statutory right the employee has.
F&F settlement format in Excel
A simple Excel F&F sheet has: employee details (ID, name, designation, date of joining, last working day, service in years and months); attendance for the last month; one row for each earning and deduction with a formula; and a net payable line. A typical column layout:
| Column | Content |
|---|---|
| A–F | Employee ID, name, designation, date of joining, last working day, completed years of service |
| G–K | Monthly rates: basic, HRA, other allowances, gross, wages for PF and gratuity |
| L–P | Earnings: salary for days worked, leave encashment, gratuity, bonus, reimbursements |
| Q–U | Deductions: PF, ESI, PT, TDS, advance or loan recovery |
| V | Net payable, with a check that it equals earnings minus deductions |
Link it to your payroll workbook for the salary components so the same rates and wage definitions are used; see our payroll in Excel guide.
F&F for termination, retirement and death
- Termination or dismissal: the same two-working-day rule applies to wages. Check the appointment letter and standing orders for notice pay in lieu of notice, and whether gratuity can be forfeited, which is allowed only in the limited cases set out in the Code on Social Security.
- Retrenchment: a worker with at least one year's continuous service gets one month's notice (or wages in lieu) and retrenchment compensation of 15 days' average pay for each completed year, or part over six months, under the Industrial Relations Code. The employer also contributes 15 days' last-drawn wages to the worker re-skilling fund. These are paid in addition to normal dues; use our retrenchment compensation calculator.
- Retirement: plan the F&F in advance, including gratuity, leave encashment (with the same ₹25 lakh lifetime exemption that applies on resignation), and PF and pension withdrawal guidance.
- Death of an employee: dues are paid to the nominee or legal heirs. Gratuity is payable regardless of length of service, and leave encashment paid to legal heirs is not taxable in their hands as salary. Help the family with the PF, EDLI and ESI claims.
Relieving and experience letters
The relieving letter confirms that the employee has been relieved from duties on the last working day and has completed exit formalities; the experience letter (or service certificate) confirms the period of employment and designation. Issue both promptly, preferably with the F&F letter. Do not withhold them to pressure an employee over a disputed recovery; deal with the dispute separately and keep a record.
Handling F&F disputes
Most disputes come from unexplained deductions or a late payment. Send the itemised statement with the letter, explain each recovery and its basis (contract clause, advance agreement), and give a named contact for queries. If the employee disagrees, review the calculation promptly, pay any undisputed amount on time, and correct errors through an off-cycle payment. A clear, documented F&F protects both sides if the matter reaches a labour authority.
Tax and statutory treatment of F&F components
| Component | Income tax | PF |
|---|---|---|
| Salary for the last month | Taxable; TDS applies | On wages |
| Leave encashment on resignation or retirement | Exempt within the formula, up to ₹25 lakh lifetime for non-government employees (section 19, Income-tax Act, 2025); excess taxable | Generally treated as outside wages (Labour Ministry FAQs) |
| Gratuity | Exempt within limits, up to ₹20 lakh lifetime for covered employees | Not wages |
| Bonus or incentive | Taxable | Statutory bonus not wages |
| Notice pay paid by the employer | Taxable | Check treatment |
Include the F&F amounts in the employee's annual tax computation and in the quarterly TDS statement (Form 138, formerly Form 24Q). Sources: Income Tax Department and EPFO. Our gratuity guide covers gratuity rules in detail.
Common F&F mistakes
- Holding wages until clearance: wages due on exit must be paid within two working days.
- Recovering everything from wages: deductions from wages are limited, and notice-pay shortfall is not a permitted deduction from wages; use non-wage dues with consent or recover separately.
- Using old wages for gratuity: gratuity is now calculated on wages as defined in the Labour Codes.
- Paying the leaver again in the regular payroll: remove the employee from the next run.
- Not marking the PF exit date: the employee cannot withdraw or transfer PF easily until it is updated.
- No written statement: a letter without the breakdown invites disputes.
Handle exits with confidence. The Practical Payroll Management e-Book covers full and final settlement, gratuity, leave encashment, PF and tax on exit, with worked examples.
Frequently asked questions
What is a full and final settlement letter?
A full and final settlement letter is the document an employer gives an employee who has left, setting out every amount paid and recovered on exit: salary for the last month, leave encashment, gratuity, bonus or other dues, deductions such as PF, tax and advances, and the net amount paid, with the date and mode of payment.
How long does an employer have to pay full and final settlement?
Under the Code on Wages, wages due on resignation, removal, dismissal, retrenchment or closure must be paid within two working days. Gratuity has its own time limit of 30 days from when it becomes payable. Other contractual dues should be paid as the policy states, but delaying wages for exit clearance is not permitted.
Is leave encashment on resignation taxable?
Leave encashment received on retirement or resignation by a non-government employee is exempt up to the least of the amounts in the formula, subject to an overall lifetime limit of 25 lakh rupees; any excess is taxable. Under the Income-tax Act, 2025 this exemption is in section 19.
Can notice pay be recovered from full and final settlement?
Notice pay can generally be recovered as the contract provides, but a notice-pay shortfall is not one of the deductions the Code on Wages allows from wages. Adjust it against non-wage dues with the employee's written consent, or recover it separately.
Who updates the date of exit in EPFO?
The employer should update the employee's date of exit on the EPFO portal after the last contribution. If it does not, an employee with an Aadhaar-verified UAN can mark the exit date online after two months from the last contribution.
Position as of 15 November 2026. Example simplified; the per-day basis, leave encashment and notice recovery follow company policy and the employment contract. Templates are a starting point, not legal advice.