University · Payroll

Full & final settlement, component by component.

Break an exiting employee's F&F into its parts — unpaid salary, notice pay, leave encashment, gratuity, pro-rata bonus, retrenchment compensation — each with the tax treatment that actually applies.

All university tools

Unpaid salary & notice pay

Last drawn monthly gross salary (₹)

Unpaid working days in exit month

Notice pay

Notice pay amount (₹)

Deducted from settlement. Per CBIC Circular 178/10/2022-GST, this recovery is not a taxable "supply" — no GST. Re-verify current CBIC guidance before relying on this.

Leave encashment & gratuity

Government employee?

Leave days encashed

Average monthly salary (₹)

10(10AA) exemption already used (₹)

Lifetime ₹25L ceiling is aggregated across employers.

Covered by the Payment of Gratuity Act, 1972?

Completed years of service

Extra months beyond that

>6 months rounds up a year

Last drawn basic + DA (₹)

Actual gratuity paid (₹)

Bonus & retrenchment compensation

Full-year eligible bonus (₹)

Days worked this bonus year

Retrenchment (not resignation / VRS)?

Gross F&F payable

₹3,61,886

Total taxable

₹1,34,130

Total exempt

₹2,72,756

Taxable vs exempt — component-wise

Component	Amount	Taxable	Exempt
Unpaid salary (worked days)	₹36,000	₹36,000	₹0
Leave encashment — Sec 10(10AA)	₹70,833	₹0	₹70,833
Gratuity — Sec 10(10)	₹2,69,231	₹67,308	₹2,01,923
Bonus (pro-rata)	₹30,822	₹30,822	₹0
Less: Notice pay recovery	−₹45,000	—	—
Total	₹3,61,886	₹1,34,130	₹2,72,756

TDS note

Every taxable component above (unpaid salary, notice pay in lieu, taxable slice of leave encashment / gratuity / retrenchment, and the pro-rata bonus) is "salary" or "profits in lieu of salary" under Section 17 — the employer deducts TDS on it under Section 192, folded into the employee’s estimated annual tax under the regime the employee has opted for. Exempt amounts are excluded from the TDS base. Where PF is also being settled, note that TDS on PF withdrawal is a separate provision (Section 192A), outside the scope of this F&F break-up.

Wage-code “2-day settlement” provision

Section 17(2) of the Code on Wages, 2019 requires wages of a discharged, dismissed, retrenched or resigning employee to be paid within two working days of the last working day. India’s four labour codes were notified into force nationally on 21 November 2025 (with central Rules under all four notified 8–9 May 2026), per Ministry of Labour & Employment commencement notifications reported at the time — so this 2-day timeline is now the applicable rule, replacing the earlier de facto 30–45 day payroll practice. State-level rules have rolled out unevenly since; confirm your state’s position before hard-coding the 2-day deadline into a compliance workflow.

On CORAA

Full and final settlement is one exit event inside a much longer payroll audit trail — CORAA keeps the component-wise tax treatment, TDS computation and statutory exemptions evidenced end to end. exit runs.

Keep going

More payroll exit & TDS tools tools.

Start the free trial Explore all tools

How full and final settlement is computed

Full and final (F&F) settlement is the one-time payout made to an employee on separation, bringing together every amount owed and every deduction due — pending salary for days worked, notice-period pay (recovered from or paid to the employee), earned-leave encashment, gratuity if the service tenure qualifies, a pro-rata share of any annual bonus, and — where the exit is a retrenchment rather than a resignation — statutory retrenchment compensation.

Each component carries its own tax rule rather than one blanket treatment: unpaid salary and pro-rata bonus are fully taxable; leave encashment and gratuity are exempt up to specific statutory formulas and caps under Sections 10(10AA) and 10(10) respectively; retrenchment compensation is exempt up to the lower of the amount received, the Industrial Disputes Act formula, and a notified ceiling under Section 10(10B). Notice pay recovered from the employee is not employee income at all — it is a deduction from the amount otherwise payable, and (per current CBIC guidance) is outside GST.

Because gratuity, leave encashment and retrenchment compensation exemptions are computed against last-drawn pay, completed years of service, and lifetime statutory ceilings, the same total settlement amount can carry very different tax outcomes depending on how it is split across components — which is why F&F needs a component-wise break-up rather than a single number.

Worked example — private-sector employee, 7 years 4 months

Employee resigns after 7 years 4 months, last drawn basic + DA ₹50,000/month, gross salary ₹90,000/month, notice pay of ₹45,000 recovered (short notice served), 25 days of leave encashed at ₹85,000/month average salary, actual gratuity paid ₹2,69,231.

Inputs

Completed years (rounded)7 years 4 months → 7 years (≤6 months, no round-up)

Gratuity formula (15/26 × 50,000 × 7)₹2,01,923

Leave encashment (25 days × ₹2,833/day)₹70,833

Output

Gratuity exemptmin(2,69,231 paid, 2,01,923 formula, 20,00,000 cap) = ₹2,01,923

Gratuity taxable₹2,69,231 − ₹2,01,923 = ₹67,308

Leave encashmentFully within the least-of-four test — exempt

Notice pay recovery₹45,000 deducted, no GST, no income tax impact

The gratuity formula caps the exempt amount at ₹2,01,923 even though ₹2,69,231 was actually paid — the excess ₹67,308 is added to taxable salary income for the year and subject to TDS under Section 192. The notice pay recovery simply reduces the amount payable; it never enters the taxable or exempt columns.

Common mistakes

Treating notice pay recovery as taxable income

Recovery of notice pay from an exiting employee is not a receipt of income — it is a reduction of what the employer owes. It has no Section 192 TDS impact and, per current CBIC guidance, no GST impact either. Don't run it through the taxable/exempt split.

Using 15/26 for employees not covered by the Gratuity Act

Establishments or roles outside the Payment of Gratuity Act's coverage (or ex-gratia gratuity schemes) use a 15/30 divisor on average salary of the last 10 months — not the 15/26 formula. Applying the wrong divisor overstates the exempt amount.

Forgetting the leave-encashment lifetime ceiling is aggregated

The ₹25,00,000 Section 10(10AA) ceiling for non-government employees applies across ALL employers over the employee's working life, not per employer per exit. If exemption was already claimed with a previous employer, the remaining headroom is reduced accordingly.

Applying Section 10(10B) to a resignation or VRS

Retrenchment compensation exemption under Section 10(10B) applies specifically to retrenchment (and closure) as defined under the Industrial Disputes Act — not to a voluntary resignation (no exemption) or voluntary retirement (which has its own Section 10(10C) exemption with a different ₹5,00,000 ceiling and conditions).

Assuming the wage-code 2-day settlement timeline is already binding everywhere

The Code on Wages 2019 provision for settling wages within two working days of exit is often cited as settled law. Labour-code commencement has rolled out unevenly by provision and state — verify the current notification before building a hard compliance deadline around it.

Frequently asked questions

What components make up a full and final settlement?+

Typically: unpaid salary for days worked in the exit month, notice pay (recovered from or paid to the employee), leave encashment, gratuity (if the tenure qualifies), any pro-rata bonus or variable pay, retrenchment compensation where applicable, and adjustments for loans, advances or unreturned company property. PF and gratuity trust payouts are often processed separately from the payroll F&F run.

Is notice pay recovery taxable or subject to GST?+

It is not employee income, so there is no income-tax angle. On GST, CBIC Circular No. 178/10/2022-GST (para 7.7) took the position that notice pay recovered from an employee is not consideration for a "supply" by the employer and is therefore not liable to GST — this has been the department's consistent position since, and has been affirmed in subsequent Authority for Advance Ruling and High Court decisions. Confirm no fresh CBIC clarification has changed it before relying on it for a specific case.

How is the leave encashment exemption computed on exit (non-government employee)?+

Least of: (a) leave encashment actually received, (b) 10 months' average salary, (c) cash equivalent of leave at credit (capped at 30 days per year of completed service), and (d) the statutory ceiling of ₹25,00,000 effective 1 April 2023 (CBDT Notification No. 31/2023) — this ceiling is a lifetime aggregate across employers, not a per-exit limit.

Does the gratuity ₹20 lakh cap apply per employer or over a lifetime?+

The ₹20,00,000 Section 10(10) cap effective 29 March 2018 is also a lifetime aggregate across all employers for employees covered by the Payment of Gratuity Act (and for others by administrative extension) — not a fresh ₹20L allowance at every job change.

Is the "settle F&F within 2 days" rule already in force?+

Yes, as of the four labour codes' national commencement on 21 November 2025 (central Rules under all four codes followed on 8–9 May 2026) — Section 17(2) of the Code on Wages, 2019 now requires final wages on discharge, dismissal, retrenchment or resignation to be paid within two working days of the last working day, replacing the earlier de facto 30–45 day practice. State-level rule rollout has been uneven, so confirm your state's position before hard-coding the deadline into a workflow.

How is TDS deducted on F&F payments?+

Everything that counts as "salary" or "profits in lieu of salary" under Section 17 — unpaid salary, notice pay paid in lieu, the taxable slice of leave encashment / gratuity / retrenchment compensation, and pro-rata bonus — is added to the employee's estimated annual taxable salary and TDS is deducted under Section 192 at the point of payment, based on the regime the employee has opted into for the year.

Authoritative sources

Income-tax Act, 1961 — Sections 10(10), 10(10AA), 10(10B), 17, 192; Payment of Gratuity Act, 1972; CBIC Circular No. 178/10/2022-GST — Cross-check the leave-encashment and gratuity ceilings, and the GST treatment of notice pay recovery, against the latest CBDT/CBIC notifications before relying on this calculator for a live settlement.

Always confirm against the latest version of the source. Regulations evolve and amendments are common.

Related calculators

Gratuity eligibility checker →Gratuity actuarial (Ind AS 19) calculator →Leave encashment calculator →Salary TDS (Sec 192) calculator →HRA exemption calculator →Form 16 explainer →

Share this tool

Last reviewed: 2026-07-29 · For informational purposes only — not professional advice.