Full and Final Settlement Checklist for Indian Startups
Full and Final Settlement Checklist for Indian Startups
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A full and final settlement checklist has to start with the new deadline: since the labour codes came into force on 21 November 2025, wages due to someone leaving must be paid within two working days of their last day. Gratuity, if they're eligible, follows separately, usually within 30 days. Everything else on this list is about getting the amount right and the paperwork clean.
Who this is for: founders and HR leads handling exits without a payroll team, especially the first few.
Exits are when people remember how you treated them. A fast, correct settlement is the cheapest goodwill you'll ever buy.
Notice and last day
- Resignation or termination letter received and acknowledged in writing.
- Notice period confirmed from the offer letter or contract.
- Last working day agreed, including any notice waiver or buyout.
- Handover plan: who takes over what, and by when.
- Manager, IT, finance and admin told on the same day, so clearances run in parallel.
What goes into the F&F
| Pay the employee | Deduct |
|---|---|
| Salary for days worked in the final month | Notice shortfall, only if the contract allows recovery |
| Leave encashment for unused earned leave, as per your policy | Unrecovered salary advances or loans |
| Gratuity, if eligible (see below) | Cost of unreturned assets, only with a signed acknowledgement |
| Pending bonus, incentives or variable pay that has been earned | TDS on the taxable amounts |
| Pending expense reimbursements | Professional tax, where your state levies it |
| Notice pay, if you waived their notice period |
Use your leave policy for encashment. Earned leave is usually encashable; sick and casual leave usually aren't. Our leave policy template helps if you don't have one yet.
Gratuity under the new codes
- Check eligibility. Permanent employees: five years of continuous service. Fixed-term employees: one year.
- Use the new wage base. Gratuity is worked out on "wages" under the Code on Wages. If allowances like HRA are more than 50% of total pay, the excess is added back. A tiny basic pay no longer keeps gratuity low.
- Apply the formula. 15 days' wages for every completed year of service. A part year of more than six months counts as a full year. One day's wage is monthly wages divided by 26.
- Apply the ceiling. The working cap is ₹20 lakh until a new figure is notified under the code.
Example: last monthly wages of ₹60,000 and 6 years 8 months of service, which counts as 7 years. Gratuity = 15 ÷ 26 × ₹60,000 × 7 = ₹2,42,308.
For non-government employees, gratuity is tax-free up to ₹20 lakh.
Time limits to pay
| What | Deadline |
|---|---|
| Final salary, leave encashment, reimbursements and other wage dues | Within 2 working days of the last working day |
| Gratuity | Usually within 30 days of becoming payable |
| PF transfer or withdrawal | The employee claims it on the EPFO portal; you approve and update the exit date promptly |
Central and state rules under the codes are still being finalised, so confirm the current position with your CA or labour adviser.
Documents to hand over
- F&F statement, line by line, signed or acknowledged by the employee.
- No-dues certificate and asset return receipt.
- Relieving letter.
- Experience letter with dates and designation.
- Exit date updated with EPFO, so their PF can move to the next employer.
- Form 16 at the end of the year, including the F&F payments.
- ESOPs: unvested options lapse; vested ones follow your exercise window. See our ESOP guide.
Keep the F&F records for at least three years.
Exit interview
- Fifteen minutes, ideally with someone other than their manager.
- Three questions: what should we keep, what should we change, what would have made you stay.
- Write down the answers and read them again every quarter. Patterns show up quickly.
Common mistakes
- Running F&F on the old 30 to 45 day cycle. The legal limit is now two working days for wages.
- Calculating gratuity on basic pay alone when allowances exceed half of total pay.
- Forgetting fixed-term staff now qualify for gratuity after one year.
- Recovering notice pay the contract doesn't allow.
- Leaving the PF exit date blank, which stops the person moving their PF.
Free download
Full and final settlement checklist
With gratuity and leave calculators.
Excel sheet, 16 KB
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Questions people ask
What is the time limit for full and final settlement in India?
Under the Code on Wages, in force since 21 November 2025, wages due to someone who resigns, is dismissed, removed or retrenched must be paid within two working days of their last day. Gratuity has its own timeline and is usually paid within 30 days. Check your state's rules as they are finalised.
Who is eligible for gratuity under the new labour codes?
Permanent employees qualify after five years of continuous service. Fixed-term employees now qualify after one year. Gratuity is 15 days' wages for each completed year, with a day's wage taken as monthly wages divided by 26. The working ceiling is ₹20 lakh until a new figure is notified.
What is included in full and final settlement?
Unpaid salary for the final month, leave encashment for unused earned leave, gratuity if eligible, pending bonus and reimbursements, and notice pay if you waive the notice period. From this, you deduct notice shortfall if the contract allows it, unrecovered advances, TDS and professional tax.
Can an employer hold back the relieving letter until F&F is done?
Keep the two separate. Pay what's owed within the legal time limit and issue the relieving letter once handover and asset return are complete. Withholding documents to pressure someone is risky, and it rarely helps when the amounts in dispute are small.
Sources
- KPMG India: Implementation of the labour codes (opens in a new tab)
- Kredily: Gratuity under the new labour codes (opens in a new tab)
- PocketHRMS: Full and final settlement in India, 2026 (opens in a new tab)
- King Stubb & Kasiva: The 50% wage rule and gratuity (opens in a new tab)
This is general information, not legal or tax advice. Check with your CA or lawyer for your company's situation.