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Full and final settlement is the process of calculating all the dues payable to an employee who resigns, retires, or is removed by the management. The settlement process is not just limited to the salary drawn by the employee but also deductions.

This article covers all you need to know about the full and final settlement process and the calculations involved.

Whether an employee resigns from the job or is let go by the management, they are paid all the dues for their service till the last working day as FnF or full and final settlement. This includes any additional earnings or deductions as well.

The full and final settlement consists of clearances from various departments like IT, finance, HR, and admin. Also, it is important to understand which components to include while calculating the final dues payable to the employee. Let’s look at each of the activities in detail:

This involves returning company assets such as laptop, monitor, keyboard or mouse – whatever asset was provided to the employee on the last working day. In case of any damage, the same can be recovered from the employee FnF.

Employee account is updated with resigned/removed (whatever applicable) and email ID is deleted from the IT infrastructure.

This involves any outstanding reimbursements, expenses on company cards. Following are the various components to calculate the final dues payable to the employee:

As per the Payment of Wages Act, 1936, the salary due for the previous month should be paid up to the 7th or 10th of the following month. But, when the employee resigns from a job, the salary due up to the date of resignation needs to be calculated.

Unpaid salary also includes the annual benefits payable to employees like LTA (leave travel allowance) or other arrears. Since these amounts are usually paid once in the year, the liability should be calculated up to the employee’s last working day.

The calculation of this will depend on your company’s policy around benefits.

Recommended read: Gross Salary Meaning, Components & Calculation

As per the provisions of the Factories Act, 1948, the amount of unavailed leaves and bonuses need to be cleared by the 7th or 10th of the following month after the resignation.

The leaves available to the employees are different from company to company depending on a company’s policy. These leaves are usually called privilege leaves available for employees against continued service.

Here again, the leave encashment policy varies from company to company and hence the calculation of this component will depend on it.

Read more in our blog post ‘Leave Encashment Calculation.’

Similarly, bonuses can be awarded by the employer on special occasions or for exemplary performance by the employees. Any amount of the bonus awarded to the employee must also be paid.

A portion is deducted from the employee’s salary every month, and the employer also contributes the same amount. This pool of funds is deposited by the employer as Provident Fund and Pension Fund for the employees and helps build a corpus.

Provident Fund is payable to all employees in confirmed service, while Pension is payable on completion of 10 years of service on FnF settlement.

If the employee is resigning to join a new job, the PF/Pension can be transferred to the new employer or paid to the employee. On retirement, the fund balance is payable to the employees.

Read more about ‘Employee Provident Fund’ in this blog post

As per the Payments of Gratuity Act, gratuity is payable to an employee who has served the company for 4 years and 10 months or more. Any employee resigning from the job or being terminated after completion of this period is entitled to receive gratuity payment within 30 days. If there is any delay in payment of Gratuity during FnF settlement beyond 30 days, interest is payable to the employee.

Read more about ‘Gratuity & its calculation’ in this blog post

Any tax liability arising on the FnF amount is chargeable from the amount payable. TDS is deductible from the components that are taxable under the Income Tax Act, 1961. Although, the amount paid for gratuity and unpaid leaves is exempt from TDS under the Income Tax Act.

There are various HR policies that vary from company to company related to joining bonus, L&D, and notice period. Based on an employee’s tenure or company policy the joining bonus or a company’s latest bonus might be recovered in the FnF settlement.

Also, if the notice period falls short, the employee may/may not have to pay the relevant amount in the FnF settlement.

This involves getting the employee ID card or other related assets that are usually needed for entry/access in the company.

It is essential to note that an employee, whether resigning or being terminated, has the right to get all the dues settled within a reasonable timeframe. It is a common practice to finalise the process within 30-45 days from the employee’s last working day.

If the employer fails to fulfil the FnF settlement requirements, the employee can contest it legally, and the employer will be liable to pay interest on all the dues as a penalty.

The FnF settlement letter is issued with reference to the resignation letter submitted by the employee. There is no set format for the FnF letter and sometimes companies just generate a payslip in place of the letter. The following details should form part of the payslip.

Download FnF Payslip Format in Word for Free

Download FnF Payslip Format in PDF for Free

While computing the value of FnF settlement amount, the employers should keep the following points in mind:

Now that you know about the full and final settlement process, isn’t it a lot to do manually?

With RazorpayX Payroll, you can leave all the tedious calculations related to FnF settlement to the software and focus on other important tasks. Everything from leave encashment to gratuity calculation is automatically calculated. All you need to do is input the number of leaves and salary.

RazorpayX Payroll is an all-in-one HR software that takes care of:

And more!

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