Full and final settlement, commonly known as the F&F settlement is a process followed by organizations to settle all the outstanding dues with an employee who is leaving the organization for the following reasons -
The full and final settlement process involves calculating and paying the employee's last month's salary, tax deductions, bonus earnings, unused leaves, and any other outstanding dues such as reimbursements, gratuity, and provident fund.
This settlement becomes crucial to ensure that both the employee and the employer settle all the outstanding financial obligations to each other before parting ways. It helps maintain a healthy relationship between the employer and the employee and avoids any legal disputes that may arise in the future.
Check: Salary hike calculator
A full and final settlement process can be time-consuming. However, these are the basic steps followed by any organization. Please note that the following steps can change according to the company policy.
The Full and Final Settlement calculation can be tedious with a lot of components involved for calculation. The net payable full and final settlement amount is calculated based on inclusions, which are basically the earnings and deductions, which are deducted from the earnings mentioned.
Let us have a look at the major components involved in the full and final settlement calculation.
Inclusions
Unpaid salary
Unpaid salary is the salary that an employee has earned for the days worked between the date of resignation and the last working day.
In other cases, the full and final settlement is calculated based on how the employees are paid during the notice period.
For instance, if an employee serves a notice period of 2 months, the organization can pay the employee his/her salary for 1 month and use the full and final settlement for the next month. Or, the company can use the full and final settlement for the entire 2-month notice period.
This includes any pending salaries for the previous months. Additionally, any other outstanding payments like arrears and Leave Travel Allowance (LTA) are also included in the unpaid salary calculation.
Unpaid salary formula
no. of days worked X gross monthly salary
26 (or the no. of paid days in a month)
Non-availed leaves and bonus
Non-availed leaves and bonuses are also included in the Full and Final Settlement amount. These must be encashed and added to the full and final settlement of the employee.
According to regulations, all dues from unpaid leaves must be paid to the employee on or before the 7th and 10th of the following month.
Encashment of Non-availed leaves and bonus formula
no. of days of non-availed leaves X monthly salary
26 (or the no. of paid days in a month)
Note: Earned leaves and leaves offered in the employee’s contract can also be considered non-availed leaves if unused.
Organizations typically encash unpaid leaves in two ways, they leave encashment based on per day’s basic salary and a pre-defined fixed amount (decided by the organization).
The company may choose to fix an amount that can be encashed against a paid leave, which is not dependent on the employee's salary directly.
Deductions
Deductions refer to the various payments that are deducted from an employee's final dues, this includes
Income tax deductions
The exact deductions vary based on factors such as the employee's income, in-hand salary, and organization, among others. Provident fund and professional taxes are typically based on the employee's income, while income tax deductions depend on their income bracket.
The TDS (Tax Deducted at Source) deductions are exempted for encashed leaves and gratuity, as per the Income Tax Act.
In India, employers earning up to 2.5 LPA are exempted from income tax. However, employees earning between 2.5-5 LPA are subject to TDS deductions of 5%, and so on.
Gratuity
Gratuity must be paid within 30 days of the employee's separation from the company. If not paid within the stipulated time, the company may have to pay gratuity with interest.
Gratuity is a cash benefit that employers provide to employees who have completed a minimum of 4 years or 240 days of service.
Gratuity formula
15 X years of working
26 (or the no. of paid days in a month)
Check: Gratuity calculator in India
Pension
When an employee completes 10 years of "pensionable service" (minimum) with the organization are eligible for pensions.
A "Scheme certificate" is provided after retirement or upon reaching 58 years of age to avail the pensions. Most employees receive a pension as part of the E.P.S. (Employee Pension Scheme), which specifies a minimum pension amount of Rs 1000, which is around Rs 7500.
As per Segment 72(5) of the E.P.F Act 1952, businesses must submit the E.P.F (Employer’s Provident Fund) guarantee forms within 5 days of the employee's claim.
Download the Full and final settlement calculation sheet
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