Full and Final Settlement Rules 2026: The 2-Day Law
What goes into a full and final settlement in India, the Code on Wages rule to pay within two working days, how gratuity, leave encashment and notice pay are taxed.
Updated 27 September 2026 · 4 minute read
When you leave a job, your full and final settlement (F&F) is the last payment your employer owes you: salary up to your last day, encashed leave, any bonus that is due, gratuity if you qualify, less whatever you owe them. Since the labour codes came into force on 21 November 2025, the salary part has a legal deadline: section 17(2) of the Code on Wages requires it within two working days of your resignation, removal, dismissal or retrenchment.
In practice many companies still run F&F on a 30 to 45 day cycle. Here is what you are owed, when, and how the tax works.
What goes into the settlement
| Item | Usually |
|---|---|
| Salary for the days worked in your last month | Paid |
| Leave encashment for unused earned leave | Paid, if your policy or the law allows encashment |
| Bonus or incentives already earned | Paid, per your contract |
| Gratuity, if you are eligible | Paid, on its own timeline |
| Reimbursements you have submitted | Paid |
| Notice period shortfall | Recovered, if you did not serve it and it was not waived |
| Salary advance, loans, unreturned assets | Recovered |
| Excess leave taken | Recovered, if your policy says so |
Your PF is not part of this cheque. You withdraw or transfer it yourself through EPFO, and the employer only has to support the claim.
The deadlines
- Wages: two working days. Section 17(2) of the Code on Wages covers an employee who has been removed, dismissed or retrenched, or who has resigned, and says the wages payable must be paid within two working days of that event. Wages here means salary in the labour code sense: basic, DA and retaining allowance, plus allowances above the 50% line, as explained in how the labour codes change your salary.
- Gratuity: within 30 days of becoming payable. Gratuity has always had its own timeline, and interest becomes due if it is paid late.
- Everything else follows your contract and company policy, which is where the 30 to 45 day cycles come from.
If the wages are not paid on time, you can raise it with your employer's HR in writing first, then with the labour authorities for your state.
How each part is taxed
All of it is salary income in the year you receive it, but several parts carry exemptions. The exemptions sit in section 19 of the Income-tax Act, 2025, and apply in both the new and the old regime.
- Last month's salary and bonus: fully taxable at your slab rate.
- Leave encashment: tax-free up to the least of four limits, including a lifetime cap of ₹25 lakh, if you receive it when you leave. The limits and a worked example are in leave encashment tax exemption.
- Gratuity: tax-free up to the least of the amount received, the formula amount and ₹20 lakh. The gratuity calculator shows the split.
- Notice pay you receive because your employer let you go without serving notice is taxable salary.
Your employer deducts TDS on the settlement under section 392 and shows it in your Form 130 (the new name for Form 16). If you join a new company in the same year, give the new employer your previous salary and TDS so they do not under-deduct, or you will owe the gap when you file.
Before you accept the settlement
- Ask for the F&F statement in writing and check every line against your last payslip.
- Count your leave. Check the balance and the per-day rate used to encash it.
- Check notice recovery. If your manager agreed to waive part of your notice, get the waiver in writing before your last day.
- Collect your documents: relieving letter, experience letter, the final payslip and, when it is issued, Form 130.
- Start your PF transfer, not a withdrawal, if you are joining another job. Withdrawing before five years of continuous service makes the balance taxable; the PF withdrawal calculator shows by how much.
Frequently asked questions
Is full and final settlement now paid in two days?
The salary part is required to be. Section 17(2) of the Code on Wages, in force since 21 November 2025, says wages due on resignation, removal, dismissal or retrenchment must be paid within two working days. Gratuity and other items follow their own timelines.
What is included in full and final settlement?
Salary for your last month, encashed leave, any bonus or incentive already earned, gratuity if you are eligible and pending reimbursements, less recoveries such as unserved notice, advances and unreturned assets. PF is settled separately through EPFO.
Is leave encashment in full and final settlement taxable?
Partly. Leave encashment received when you leave a job is tax-free up to the least of four limits, with a lifetime ceiling of ₹25 lakh. Anything above that is taxed as salary.
Can my employer deduct notice pay from my final settlement?
Yes, if you did not serve the notice period your contract requires and it was not waived. Ask for any waiver in writing before your last day.
Is gratuity part of full and final settlement?
It is usually paid along with it, but it has its own deadline of 30 days from when it becomes payable. Permanent employees need five years of service; fixed-term employees get it pro-rata at the end of their contract.