Full and final settlement refers to the process of settling an employee’s dues with their employer when they leave their job. It includes the payment of any outstanding salary, bonuses, gratuity, and other benefits that the employee is entitled to receive from their employer. 

It ensures that employees receive all the payments and benefits that they are owed by their employer, avoids legal issues, and also helps to maintain a positive relationship between the employer and the departing employee, which is important for future references and networking opportunities.

FnF Payments

There are many payments that an employer owes to employees such as any outstanding salary, unpaid leave, bonuses, and any other payments. 

Outstanding Salary

The salary that is due to the employee up until their last working. The outstanding salary is based on the number of days worked by the employee up until their last working day. 

This is calculated by dividing the monthly salary by the number of working days in the month and then multiplying this by the number of days worked by the employee. Any arrears, increments, or other salary adjustments that are pending are also included in the calculation.

Unpaid Leave

If the employee has taken any leave that is due to them but has not been availed yet, then this is usually adjusted against their salary as part of the full and final settlement.

The total number of leave days that are due to the employee is divided by the monthly salary and then multiplied by the number of leave days that are yet to be availed.

Bonus Payouts

If the employee is entitled to any bonus payments as per their employment contract or company policy, then these are also paid as part of the full and final settlement

The calculation of bonus payouts is usually based on the employee’s performance during the period for which the bonus is being paid. The bonus amount may be a fixed amount or a percentage of the employee’s salary. The calculation method for bonus payouts may vary depending on the company policy or employment contract.

Expense Reimbursements

The expense reimbursements are based on the actual expenses incurred by the employee on behalf of the company. If the employee has any outstanding expense reimbursements that have not been settled that have to be paid as a part of FnF. This includes any travel expenses, phone bills, or other expenses that were incurred on behalf of the company.

The employee is required to submit the relevant bills and receipts to the employer for reimbursement. It is usually subject to certain limits and restrictions as per company policy.

Provident Fund (PF)

The employer is also required to settle the employee’s PF account as part of the FnF settlement. This includes the employee’s contribution, as well as the employer’s contribution to the PF account.

The contribution rate is usually fixed by the government. The employer is required to provide the employee with a PF account statement that shows the total balance.


If the employee has completed at least five years of continuous service with the employer, then they are entitled to receive gratuity as per the Payment of Gratuity Act. The gratuity payout is calculated based on the employee’s last drawn salary and the duration of their employment.

The gratuity amount is calculated as 15 days’ salary for every completed year of service, subject to a maximum limit of 20 lakhs. The employer is required to provide the employee with a gratuity calculation sheet, and the gratuity amount is settled as part of the full and final settlement.

In addition to the above calculation, it is important to comply with the legal requirements for each type of payment. For example, the payment of PF and gratuity is governed by specific laws and regulations, and failure to comply with these requirements can lead to legal issues and penalties.


Some taxes need to be paid as part of the full and final settlement. The tax implications of FnF settlement payment include income tax and TDS deductions as described below.

Income Tax

Full and final settlement payments such as outstanding salary, bonus payouts, and gratuity are considered as income for the employee and are therefore subject to income tax. The tax rate depends on the employee’s income slab, as per the Income Tax Act.

TDS Deductions

The employer is required to deduct TDS (Tax Deducted at Source) on any full and final settlement payments. The TDS rate depends on the nature of the payment and the employee’s income slab. The employer is also required to issue a TDS certificate to the employee for the tax deducted.

The employee is required to file an income tax return for the relevant financial year, which includes the income from the full and final settlement payment. The employee may be eligible for certain tax deductions and exemptions on the FnF settlement payment. For example, gratuity payments are exempt from income tax up to a certain limit.

Legal Requirements

The employer is required to settle all outstanding dues within a specified time limit, which is generally 30 days from the last day of the employee’s service. 

The employer must provide the employee with an F&F statement, with details of the settlement amount and the deductions made. The employer must also provide the employee with Form 16, which is a certificate of tax deduction.


The full and final settlement is a set of various payments that the employer owes to the employee. All the payments are calculated according to various rules and regulated by concerned bodies. It’s essential for employers to comply with FnF guidelines as failure to do so can result in penalties or legal action against the employer.