{"id":7050,"date":"2026-07-20T14:21:04","date_gmt":"2026-07-20T08:51:04","guid":{"rendered":"https:\/\/lawsikho.com\/blog\/?p=7050"},"modified":"2026-07-20T19:24:11","modified_gmt":"2026-07-20T13:54:11","slug":"full-and-final-settlement-india","status":"publish","type":"post","link":"https:\/\/lawsikho.com\/blog\/full-and-final-settlement-india\/","title":{"rendered":"Full and Final Settlement India: 2-Working-Day Rule"},"content":{"rendered":"<!--\n  Full and Final Settlement in India - VERSION-A\n  WP-paste-ready HTML. Paste directly into the WordPress block editor as\n  Custom HTML or via the Code Editor view.\n  - Slug: full-and-final-settlement-india\n  - Last verified: 2026-07-20\n  - Schema (Article + FAQPage) is included at the bottom in separate wp:html blocks.\n  - VERSION-A: clean (no CTAs \/ Expert Inserts)\n-->\n\n\n<!--\nPUBLISH INSTRUCTIONS (HTML comment, strip before publishing):\n- Post type: legal-substantive | Type A (regulatory explainer) | intro_type: summary\n- Cluster: SPOKE under hub \"Labour Laws in India\" (labour-laws-in-india)\n- Course CTA (VERSION-B): Certificate Course in Labour Laws and HR Practices\n- Sister links: iPleaders (what to do if employer does not pay salary) placed; Skill Arbitrage SKIPPED (no relevant law-blog article)\n- Statutes resolved to India Code at first mention (Code on Wages 2019 -> 15793; Code on Social Security 2020 -> 16823; OSH Code 2020 -> 22041); Sections 17 and 54 resolved to Indian Kanoon. No case law (statute-driven topic).\n- Internal links (all confirmed live in corpus): employment-agreement-drafting-india, how-to-draft-a-clause-for-termination-and-breach-and-consequences-of-breach, mastering-the-art-of-responding-to-labour-authority-notices, new-labour-code-compliance-checklist-india-2026\n-->\n\n<p>Last verified: 2026-07-20<\/p>\n<p>Full and final settlement in India is the closing payout an employer makes when an employment ends, netting everything the employee is owed against everything the employee owes back. On the credit side sit earned salary up to the last working day, encashment of unused leave, gratuity where the service qualifies, any statutory bonus, and pending reimbursements. On the debit side sit notice-pay recovery, unrecovered advances, the value of unreturned assets, and tax deducted at source. Since the <a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/15793\" target=\"_blank\" rel=\"noopener\">Code on Wages, 2019<\/a> came into force on 21 November 2025, the wages in that settlement must reach the employee within two working days of exit.<\/p>\n<p>This article sets out what a full and final settlement in India contains, the new two-working-day payout rule, how the amount is worked out, what the deadline does and does not cover, the lawful deductions and recovery routes, and what the 2026 labour codes changed.<\/p>\n\n<hr>\n\n<p>For years the settlement ran on informal timelines. Employees routinely waited 30, 45, sometimes 60 days for their dues, and the relieving letter often arrived before the money did. Section 17(2) of the Code on Wages puts a hard clock on the wages part of that payout, and it is measured in working days, not months.<\/p>\n<p>One caveat before the components. &#8220;Wages&#8221; is a defined term under the Code, and not every rupee in a settlement is wages. Gratuity and statutory bonus sit outside that definition and run on their own separate timelines. Getting that split right is where the new compliance actually turns.<\/p>\n\n<hr>\n\n<nav class=\"ls-toc\" aria-label=\"Table of contents\">\n<h2>Table of Contents<\/h2>\n<ol class=\"ls-toc-list\">\n<li><a href=\"#h2-1\">Components of a full and final settlement<\/a>\n<\/li>\n<li><a href=\"#h2-2\">The two-working-day payout rule<\/a>\n<\/li>\n<li><a href=\"#h2-3\">What the two-day deadline actually covers<\/a>\n<\/li>\n<li><a href=\"#h2-4\">Calculating the settlement amount<\/a>\n<\/li>\n<li><a href=\"#h2-5\">Deductions, delay and recovering a withheld settlement<\/a>\n<\/li>\n<li><a href=\"#h2-6\">What the 2026 labour codes changed for full and final settlement<\/a>\n<\/li>\n<\/ol>\n<\/nav>\n\n<hr>\n\n<h2><a id=\"h2-1\"><\/a>Components of a full and final settlement<\/h2>\n<p>The components of a full and final settlement are the earned dues an employer owes an employee at exit, set against the amounts the employee owes back to the employer. The payout is a net figure, and every line in it falls into one of those two columns. Knowing which line sits where is the difference between a settlement that clears cleanly and one that ends in a claim.<\/p>\n<p>On the earnings side, the first and largest item is usually salary for the days actually worked in the final month, up to and including the last working day. To that the employer adds the encashment of unused earned leave, gratuity where the length of service qualifies for it, any statutory bonus that has accrued, and reimbursements the employee has claimed but not yet been paid, such as travel or medical bills already submitted. Where variable pay or an incentive has crystallised under the terms of the contract, that is due as well.<\/p>\n<p>Not every item is automatic. Gratuity is payable only where the employee crosses the qualifying service, five years of continuous service for a regular employee, or one year on a pro-rata basis for a fixed-term employee under the <a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/16823\" target=\"_blank\" rel=\"noopener\">Code on Social Security, 2020<\/a>. Statutory bonus is due only to employees within the wage threshold the Code on Wages sets for bonus eligibility. So the exact shape of a settlement depends on who is leaving, how long they served, and what they earned.<\/p>\n<h3>What the employee owes back<\/h3>\n<p>The deduction side of a full and final settlement is limited to what the employee genuinely owes or what the law requires the employer to withhold. The most common line is recovery of pay for a notice period the employee did not serve, where the contract allows the employer to adjust salary in lieu against the settlement. Alongside that sit any salary advances or loans still outstanding, the book value of company assets not returned (a laptop, a phone, an access card), and the final month&#8217;s statutory deductions for provident fund, employee state insurance and professional tax. One thing the settlement does not pay out is the provident fund corpus itself: that balance stays with the Employees&#8217; Provident Fund Organisation and is withdrawn or transferred by the employee separately through the UAN, so only the final month&#8217;s contribution shows up in the exit numbers.<\/p>\n<p>Tax is the last adjustment. The taxable parts of a settlement, chiefly the salary, and leave encashment above the exempt limit, attract tax deducted at source, which the employer withholds before releasing the balance. What lands in the employee&#8217;s account is the earnings total minus these lawful deductions, and nothing beyond them. The precise notice, recovery and asset-return terms usually come from the contract itself, which is why the exit position is easier to run when the <a href=\"https:\/\/lawsikho.com\/blog\/employment-agreement-drafting-india\/\" target=\"_blank\" rel=\"noopener\">employment agreement was drafted<\/a> with those clauses spelled out.<\/p>\n\n<h2><a id=\"h2-2\"><\/a>The two-working-day payout rule<\/h2>\n<p>The two-working-day payout rule requires an employer to pay the wages due on exit within two working days of the employee leaving. <a href=\"https:\/\/indiankanoon.org\/doc\/151218690\/\" target=\"_blank\" rel=\"noopener\">Section 17(2) of the Code on Wages, 2019<\/a> is the source: where an employee has been removed or dismissed from service, has been retrenched or has resigned, or has become unemployed due to the closure of the establishment, the wages payable are to be paid within two working days of that event.<\/p>\n<p>This is a genuine departure from the position most workplaces ran on. Under the old framework a monthly-paid employee simply expected the settlement in the next payroll cycle, and delays of several weeks drew no real penalty. The Code compresses the wages part of the exit payout into two working days, whatever the reason for the exit, and whether the parting is friendly or contested.<\/p>\n<p>The rule sits next to a general timing rule for people still in employment. Section 17(1) fixes when ordinary wages must be paid: before the seventh day of the following month for a monthly wage period, and correspondingly sooner for weekly and daily wage periods. Section 17(2) is the exit-specific override. The moment employment ends by any of the listed routes, the two-working-day clock replaces the ordinary monthly cycle for the wages then due.<\/p>\n<p>Two points on scope are worth stating plainly. First, the rule is not limited to permanent staff. It reads across contract types, so a fixed-term employee, a contract worker and a permanent employee are all entitled to the same two-working-day treatment on their wages, with apprentices being the usual exception. Second, Section 17(3) lets the appropriate Government notify a different time limit where circumstances make that reasonable, so the two-day figure is the default rather than an absolute that can never move.<\/p>\n\n<h2><a id=\"h2-3\"><\/a>What the two-day deadline actually covers<\/h2>\n<p>The two-day deadline covers the wages payable on exit, and not automatically the whole settlement. This is the single most misread part of the new rule. Section 17(2) uses the word &#8220;wages&#8221;, and &#8220;wages&#8221; is a defined term, so the deadline reaches exactly as far as that definition reaches and no further.<\/p>\n<p>Under Section 2(y) of the Code on Wages, wages means basic pay, dearness allowance and retaining allowance. The definition then excludes a list of components, among them statutory bonus, house rent allowance, conveyance allowance, overtime, the employer&#8217;s provident fund and pension contributions, and, importantly for settlements, statutory gratuity. So the earned salary for the final days worked is squarely within the two-day clock. The pieces the Code lists as outside wages are not pulled into that clock by Section 17(2).<\/p>\n<p>Those excluded pieces carry their own statutory timelines. Gratuity is payable within 30 days of it becoming due under the Code on Social Security, 2020, the same 30-day window the earlier Payment of Gratuity Act ran. Statutory bonus has an even longer horizon: Section 39 of the Code on Wages requires it to be paid within eight months of the close of the accounting year. Neither is compressed into two days simply because it happens to be paid out at the same exit.<\/p>\n<p>Leave encashment is the grey area. It is neither obviously &#8220;wages&#8221; for the days worked nor clearly one of the excluded heads, and employers and advisers currently read it both ways, with a view to the Government issuing a clarification on whether the two-day rule extends to the full settlement or only to earned wages. The safe operating position, and the one careful HR teams have adopted since November 2025, is to release the earned-wages component inside two working days without fail, and to run gratuity, bonus and any contested leave encashment on their own defined clocks rather than assume they must all clear within two working days.<\/p>\n<p>The deadlines line up like this:<\/p>\n<table>\n<thead>\n<tr>\n<th>Settlement component<\/th>\n<th>Payment deadline<\/th>\n<th>Source<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Earned wages (basic + DA for days worked)<\/td>\n<td>Two working days of exit<\/td>\n<td>Section 17(2), Code on Wages, 2019<\/td>\n<\/tr>\n<tr>\n<td>Gratuity<\/td>\n<td>Within 30 days of becoming due<\/td>\n<td>Code on Social Security, 2020<\/td>\n<\/tr>\n<tr>\n<td>Statutory bonus<\/td>\n<td>Within 8 months of the accounting-year close<\/td>\n<td>Section 39, Code on Wages, 2019<\/td>\n<\/tr>\n<tr>\n<td>Leave encashment<\/td>\n<td>Best released with the earned wages; classification not yet settled<\/td>\n<td>Awaiting Government clarification<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<h2><a id=\"h2-4\"><\/a>Calculating the settlement amount<\/h2>\n<p>The settlement amount is the sum of the earned components minus the lawful deductions, worked out line by line rather than as a single round figure. Each earned head has its own basis, so the arithmetic is a set of small calculations that are then added together and reduced by what the employee owes.<\/p>\n<p>Earned salary for the final month is the simplest: the monthly gross apportioned to the days actually worked, so an employee who leaves on the twelfth of a 30-day month is paid roughly twelve-thirtieths of the month&#8217;s salary. Leave encashment is the last drawn basic-plus-dearness-allowance converted to a daily rate and multiplied by the number of unused earned leave days standing to the employee&#8217;s credit, with the daily rate taken on the establishment&#8217;s wage-month basis. Gratuity, where it applies, follows the statutory 15\/26 formula: last drawn basic-plus-dearness-allowance multiplied by 15\/26 for every completed year of service.<\/p>\n<p>Take a worked example. Suppose an employee resigns with a monthly gross of Rs. 60,000, of which basic-plus-dearness-allowance is Rs. 30,000, works 12 days of their final month, has 18 unused earned leave days, has served six completed years (so the five-year gratuity threshold is crossed), and did not serve 15 days of a required notice period.<\/p>\n<table>\n<thead>\n<tr>\n<th>Component<\/th>\n<th>Basis<\/th>\n<th>Amount<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Earned salary (12 of 30 days)<\/td>\n<td>60,000 x 12 \/ 30<\/td>\n<td>Rs. 24,000<\/td>\n<\/tr>\n<tr>\n<td>Leave encashment (18 days)<\/td>\n<td>30,000 \/ 30 x 18<\/td>\n<td>Rs. 18,000<\/td>\n<\/tr>\n<tr>\n<td>Gratuity (6 completed years)<\/td>\n<td>30,000 x 15 \/ 26 x 6<\/td>\n<td>Rs. 1,03,846<\/td>\n<\/tr>\n<tr>\n<td>Gross settlement<\/td>\n<td>sum of the above<\/td>\n<td>Rs. 1,45,846<\/td>\n<\/tr>\n<tr>\n<td>Less: notice-pay recovery (15 days)<\/td>\n<td>60,000 x 15 \/ 30<\/td>\n<td>(Rs. 30,000)<\/td>\n<\/tr>\n<tr>\n<td>Net before tax<\/td>\n<td>gross minus recovery<\/td>\n<td>Rs. 1,15,846<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>The figure that reaches the employee is then reduced by tax deducted at source on the taxable heads. Note that the three earned components each run on a different rule: the salary is pure apportionment, the leave encashment turns on the daily wage and the leave balance, and the gratuity turns on the 15\/26 fraction and completed years. Change the basic-to-allowance split in the salary structure and every one of these except the pure notice recovery moves with it, because each is computed on basic-plus-dearness-allowance rather than on gross.<\/p>\n<p>Leave encashment carries a tax benefit worth naming. For a government employee, leave encashment on exit is fully exempt from income tax. For a non-government employee, it is exempt up to a lifetime ceiling of Rs. 25 lakh under Section 10(10AA) of the Income Tax Act, 1961, a limit the Central Board of Direct Taxes raised from the old Rs. 3 lakh with effect from 1 April 2023. Most employees settle well within that ceiling, so their leave encashment lands tax-free, while the earned salary in the settlement is taxed as ordinary salary income.<\/p>\n<h2><a id=\"h2-5\"><\/a>Deductions, delay and recovering a withheld settlement<\/h2>\n<p>Deductions from a full and final settlement are confined to what the employee actually owes or what the law requires to be withheld, and an employer cannot treat the settlement as leverage in a departure dispute. Recovery of unserved notice pay, outstanding advances, the value of unreturned assets and tax at source are legitimate. Docking the settlement to punish an employee, or holding the whole of it back because one line is contested, is not.<\/p>\n<p>The clause that most often creates friction is notice recovery, because it is contractual rather than statutory. Whether an employer can adjust salary in lieu of a shortfall in notice, and how much, depends on what the appointment letter says, which is why the drafting of the <a href=\"https:\/\/lawsikho.com\/blog\/how-to-draft-a-clause-for-termination-and-breach-and-consequences-of-breach\/\" target=\"_blank\" rel=\"noopener\">termination and breach clause<\/a> tends to decide these arguments before they start. Where the contract is silent or unclear, an aggressive recovery is exactly the kind of deduction that gets challenged.<\/p>\n<p>Delay and short payment now carry a real price. Section 54 of the Code on Wages, read at <a href=\"https:\/\/indiankanoon.org\/doc\/5762328\/\" target=\"_blank\" rel=\"noopener\">Section 54<\/a>, makes an employer who pays an employee less than the amount due liable to a fine that may extend to Rs. 50,000. A repeat of the same offence within five years raises the exposure to imprisonment that may extend to three months, or a fine that may extend to Rs. 1,00,000, or both. Missing the two-working-day wages deadline, or shorting the settlement, is not a soft compliance lapse; it is a penalised default.<\/p>\n<p>If a settlement is withheld or underpaid, the employee is not left to the goodwill of the employer. The Code on Wages provides for a claim before the authority appointed under it, which can direct payment of the amount due together with compensation, and the machinery for <a href=\"https:\/\/lawsikho.com\/blog\/mastering-the-art-of-responding-to-labour-authority-notices\/\" target=\"_blank\" rel=\"noopener\">responding to and pursuing labour authority notices<\/a> is the practical route most disputes travel. For the fuller menu of remedies where an employer simply refuses to release dues, the iPleaders guide on <a href=\"https:\/\/blog.ipleaders.in\/what-to-do-if-employer-does-not-pay-salary\/\" target=\"_blank\" rel=\"noopener\">what to do if your employer does not pay salary<\/a> walks through the notice, the labour commissioner and the court options in sequence.<\/p>\n\n<h2><a id=\"h2-6\"><\/a>What the 2026 labour codes changed for full and final settlement<\/h2>\n<p>The 2026 change to full and final settlement is twofold: a hard two-working-day deadline on the wages component, and a larger wage base that quietly lifts several of the amounts inside the settlement. Both flow from the four labour codes coming into force together on 21 November 2025, when the Code on Wages, the Code on Social Security, the Industrial Relations Code and the <a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/22041\" target=\"_blank\" rel=\"noopener\">Occupational Safety, Health and Working Conditions Code, 2020<\/a> replaced the older labour statutes.<\/p>\n<p>The headline shift is timing. The old expectation of a settlement within the next payroll cycle, or later, is gone for the wages part; Section 17(2) now fixes two working days. This is the change employees notice first and the one employers have had to re-engineer their exit process around, because a payout that used to be assembled over weeks now has to be ready almost as the employee walks out.<\/p>\n<p>The quieter shift moves the money. The Code on Wages defines wages so that the excluded allowances are capped and basic pay must sit at roughly half of total remuneration. Because leave encashment and gratuity are both computed on basic-plus-dearness-allowance, a salary that was engineered with a thin basic and a fat allowance basket now has to be restructured, and the base those two components run on rises with it. The multipliers did not change; the figure they are applied to did.<\/p>\n<p>Leave itself was also reworked. Under the Occupational Safety, Health and Working Conditions Code, a worker earns one day of leave for every 20 days worked, and leave above the carry-forward limit can be encashed at the end of each calendar year rather than only at exit. That does not remove leave encashment from the settlement, but it can reduce the balance that piles up to be paid out at the end, depending on how the employer runs its annual leave policy.<\/p>\n<table>\n<thead>\n<tr>\n<th>Feature<\/th>\n<th>Before 21 November 2025<\/th>\n<th>Under the labour codes<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Wages payout on exit<\/td>\n<td>Next payroll cycle or later, weakly enforced<\/td>\n<td>Within two working days of exit (Section 17(2))<\/td>\n<\/tr>\n<tr>\n<td>Wage base for leave encashment and gratuity<\/td>\n<td>Often a thin basic (30 to 40 percent)<\/td>\n<td>Basic at roughly 50 percent of total pay<\/td>\n<\/tr>\n<tr>\n<td>Gratuity timeline<\/td>\n<td>Within 30 days of becoming due<\/td>\n<td>Within 30 days (retained)<\/td>\n<\/tr>\n<tr>\n<td>Statutory bonus timeline<\/td>\n<td>Within 8 months of year close<\/td>\n<td>Within 8 months (retained, Section 39)<\/td>\n<\/tr>\n<tr>\n<td>Leave encashment<\/td>\n<td>Usually only at exit<\/td>\n<td>Year-end encashment option plus exit<\/td>\n<\/tr>\n<tr>\n<td>Penalty for short payment<\/td>\n<td>Limited under older wage law<\/td>\n<td>Fine up to Rs. 50,000; up to Rs. 1,00,000 or jail on repeat<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Read together, the pattern is that the mechanics of what goes into a settlement barely moved, while the deadline tightened sharply and the base grew. For an employer, that means the settlement now has to be both faster and, for allowance-heavy pay structures, larger, and porting the old process across unchanged is the most common mistake. Working the two changes into a single exit workflow is the point at which a <a href=\"https:\/\/lawsikho.com\/blog\/new-labour-code-compliance-checklist-india-2026\/\" target=\"_blank\" rel=\"noopener\">new labour code compliance checklist<\/a> earns its place.<\/p>\n\n<h2><a id=\"faq\"><\/a>Frequently asked questions<\/h2>\n<p><strong>1. What is full and final settlement in India?<\/strong>\nFull and final settlement is the closing payout when an employment ends. It nets the employee&#8217;s earned dues, salary up to the last working day, leave encashment, gratuity where eligible, statutory bonus and pending reimbursements, against what the employee owes back, such as unserved notice pay, advances, unreturned assets and tax.<\/p>\n<p><strong>2. What are the components of a full and final settlement?<\/strong>\nOn the earnings side: salary for days worked, encashment of unused earned leave, gratuity if the service qualifies, any statutory bonus, and unpaid reimbursements or crystallised variable pay. On the deduction side: notice-pay recovery, outstanding advances or loans, the value of unreturned assets, final-month statutory deductions and tax deducted at source.<\/p>\n<p><strong>3. What is the two-working-day payout rule?<\/strong>\nUnder Section 17(2) of the Code on Wages, 2019, where an employee is removed, dismissed, retrenched, resigns, or becomes unemployed due to closure, the wages payable must be paid within two working days of that event. It came into force with the labour codes on 21 November 2025.<\/p>\n<p><strong>4. Does the two-working-day rule cover the entire settlement?<\/strong>\nNo, not automatically. Section 17(2) applies to &#8220;wages&#8221;, which under Section 2(y) means basic pay, dearness allowance and retaining allowance. Gratuity and statutory bonus are excluded from wages and keep their own timelines, and whether leave encashment must clear in two days awaits Government clarification.<\/p>\n<p><strong>5. When must gratuity in a settlement be paid?<\/strong>\nGratuity is payable within 30 days of it becoming due under the Code on Social Security, 2020, not within the two working days that apply to wages. The two-day rule does not compress the gratuity timeline.<\/p>\n<p><strong>6. When must statutory bonus be paid?<\/strong>\nStatutory bonus must be paid within eight months of the close of the accounting year under Section 39 of the Code on Wages, 2019. It is not pulled into the two-working-day exit deadline.<\/p>\n<p><strong>7. Can an employer deduct notice pay from the settlement?<\/strong>\nYes, where the contract allows recovery of salary in lieu of a notice period the employee did not serve. Notice recovery is contractual, so how much can be adjusted depends on the appointment letter. Where the contract is silent, an aggressive recovery can be challenged.<\/p>\n<p><strong>8. Is leave encashment taxable in a full and final settlement?<\/strong>\nFor a government employee, leave encashment on exit is fully exempt. For a non-government employee, it is exempt up to a lifetime limit of Rs. 25 lakh under Section 10(10AA) of the Income Tax Act, 1961, raised from Rs. 3 lakh with effect from 1 April 2023. Amounts above the limit are taxed as salary.<\/p>\n<p><strong>9. How is the settlement amount calculated?<\/strong>\nAdd the earned components (salary for days worked, leave encashment on the daily basic-plus-dearness-allowance rate, and gratuity at 15\/26 of last drawn basic-plus-dearness-allowance per completed year), then subtract lawful deductions and tax at source. Each earned head runs on its own basis rather than a single formula.<\/p>\n<p><strong>10. What is the penalty if an employer delays or shorts the settlement?<\/strong>\nSection 54 of the Code on Wages makes an employer who pays less than the amount due liable to a fine up to Rs. 50,000. A repeat within five years raises the exposure to imprisonment up to three months, or a fine up to Rs. 1,00,000, or both.<\/p>\n<p><strong>11. What can an employee do if the settlement is withheld?<\/strong>\nRaise a claim before the authority appointed under the Code on Wages, which can direct payment of the amount due with compensation. Sending a lawyer&#8217;s notice first, then approaching the labour commissioner, and finally the court, is the usual escalation where the employer refuses.<\/p>\n<p><strong>12. Did the 2026 labour codes change full and final settlement?<\/strong>\nYes. The main change is the two-working-day deadline on the wages component under Section 17(2). Alongside it, the Code on Wages 50 percent rule enlarges the basic-plus-dearness-allowance base on which leave encashment and gratuity are computed, so several settlement amounts rise.<\/p>\n<p><strong>13. Does the two-day rule apply to fixed-term and contract employees?<\/strong>\nYes. Section 17(2) reads across contract types, so fixed-term, contract and permanent employees are all entitled to their wages within two working days of exit. Apprentices are the usual exception.<\/p>\n<p><strong>14. Is the relieving letter linked to the settlement?<\/strong>\nThe two are separate obligations. The wages part of the settlement is now due within two working days of exit regardless of when the relieving letter is issued, and an employer cannot lawfully withhold statutory dues merely to hold the settlement as leverage.<\/p>\n<h2><a id=\"references\"><\/a>References<\/h2>\n<h3>Statutes<\/h3>\n<ol>\n<li><a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/2435\" target=\"_blank\" rel=\"noopener\">Income Tax Act, 1961<\/a>. Section cited: 10(10AA) (exemption for leave encashment); non-government ceiling of Rs. 25 lakh notified by CBDT Notification 31\/2023 with effect from 1 April 2023.<\/li>\n<li><a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/15793\" target=\"_blank\" rel=\"noopener\">Code on Wages, 2019<\/a>. Sections cited: 2(y) (definition of wages), 17(1) (general time limit for payment of wages), 17(2) (two working days on removal, dismissal, retrenchment, resignation or closure), 17(3) (Government power to fix a different limit), 39 (time limit for payment of bonus), 54 (penalty for paying less than the amount due). In force from 21 November 2025.<\/li>\n<li><a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/16823\" target=\"_blank\" rel=\"noopener\">Code on Social Security, 2020<\/a>. Chapter V (gratuity): Section 53 (eligibility, including pro-rata gratuity for fixed-term employees after one year) and Section 56(3) (payment within 30 days of becoming due). In force from 21 November 2025.<\/li>\n<li><a href=\"https:\/\/www.indiacode.nic.in\/handle\/123456789\/22041\" target=\"_blank\" rel=\"noopener\">Occupational Safety, Health and Working Conditions Code, 2020<\/a>. Section 32 (leave): one day of leave for every 20 days worked, with encashment of leave above the 30-day carry-forward at each calendar year end. In force from 21 November 2025.<\/li>\n<\/ol>\n<p>This article is for informational purposes only and does not constitute legal advice. For specific legal guidance, consult a qualified legal professional.<\/p>\n\n\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"Article\",\n  \"headline\": \"Full and Final Settlement in India\",\n  \"description\": \"Full and final settlement nets earned salary, leave encashment, gratuity and bonus against deductions. Under the Code on Wages, exit wages are due in two working days.\",\n  \"author\": {\n    \"@type\": \"Organization\",\n    \"name\": \"LawSikho\",\n    \"url\": \"https:\/\/lawsikho.com\"\n  },\n  \"publisher\": {\n    \"@type\": \"Organization\",\n    \"name\": \"LawSikho\",\n    \"logo\": {\n      \"@type\": \"ImageObject\",\n      \"url\": \"https:\/\/lawsikho.com\/logo.png\"\n    }\n  },\n  \"datePublished\": \"2026-07-20\",\n  \"dateModified\": \"2026-07-20\",\n  \"mainEntityOfPage\": {\n    \"@type\": \"WebPage\",\n    \"@id\": \"https:\/\/lawsikho.com\/blog\/full-and-final-settlement-india\/\"\n  },\n  \"image\": \"https:\/\/lawsikho.com\/blog\/images\/full-and-final-settlement-india.png\",\n  \"inLanguage\": \"en-IN\",\n  \"articleSection\": \"Labour Law\",\n  \"keywords\": \"full and final settlement, full and final settlement India, FnF settlement, two working days salary rule, Code on Wages Section 17, FnF components, leave encashment settlement, notice pay recovery, gratuity in full and final settlement, full and final settlement calculation\",\n  \"citation\": [\n    {\n      \"@type\": \"Legislation\",\n      \"name\": \"Code on Wages, 2019\",\n      \"identifier\": \"Act No. 29 of 2019\",\n      \"url\": \"https:\/\/www.indiacode.nic.in\/handle\/123456789\/15793\",\n      \"legislationJurisdiction\": \"IN\"\n    },\n    {\n      \"@type\": \"Legislation\",\n      \"name\": \"Code on Social Security, 2020\",\n      \"identifier\": \"Act No. 36 of 2020\",\n      \"url\": \"https:\/\/www.indiacode.nic.in\/handle\/123456789\/16823\",\n      \"legislationJurisdiction\": \"IN\"\n    },\n    {\n      \"@type\": \"Legislation\",\n      \"name\": \"Occupational Safety, Health and Working Conditions Code, 2020\",\n      \"identifier\": \"Act No. 37 of 2020\",\n      \"url\": \"https:\/\/www.indiacode.nic.in\/handle\/123456789\/22041\",\n      \"legislationJurisdiction\": \"IN\"\n    },\n    {\n      \"@type\": \"Legislation\",\n      \"name\": \"Income Tax Act, 1961 (Section 10(10AA))\",\n      \"identifier\": \"Act No. 43 of 1961\",\n      \"url\": \"https:\/\/www.indiacode.nic.in\/handle\/123456789\/2435\",\n      \"legislationJurisdiction\": \"IN\"\n    }\n  ]\n}\n<\/script>\n\n\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"FAQPage\",\n  \"mainEntity\": [\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What is full and final settlement in India?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Full and final settlement is the closing payout when an employment ends. It nets the employee's earned dues, salary up to the last working day, leave encashment, gratuity where eligible, statutory bonus and pending reimbursements, against what the employee owes back, such as unserved notice pay, advances, unreturned assets and tax.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What are the components of a full and final settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"On the earnings side: salary for days worked, encashment of unused earned leave, gratuity if the service qualifies, any statutory bonus, and unpaid reimbursements or crystallised variable pay. On the deduction side: notice-pay recovery, outstanding advances or loans, the value of unreturned assets, final-month statutory deductions and tax deducted at source.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What is the two-working-day payout rule?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Under Section 17(2) of the Code on Wages, 2019, where an employee is removed, dismissed, retrenched, resigns, or becomes unemployed due to closure, the wages payable must be paid within two working days of that event. It came into force with the labour codes on 21 November 2025.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Does the two-working-day rule cover the entire settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"No, not automatically. Section 17(2) applies to wages, which under Section 2(y) means basic pay, dearness allowance and retaining allowance. Gratuity and statutory bonus are excluded from wages and keep their own timelines, and whether leave encashment must clear in two days awaits Government clarification.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"When must gratuity in a settlement be paid?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Gratuity is payable within 30 days of it becoming due under the Code on Social Security, 2020, not within the two working days that apply to wages. The two-day rule does not compress the gratuity timeline.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"When must statutory bonus be paid?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Statutory bonus must be paid within eight months of the close of the accounting year under Section 39 of the Code on Wages, 2019. It is not pulled into the two-working-day exit deadline.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Can an employer deduct notice pay from the settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Yes, where the contract allows recovery of salary in lieu of a notice period the employee did not serve. Notice recovery is contractual, so how much can be adjusted depends on the appointment letter. Where the contract is silent, an aggressive recovery can be challenged.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Is leave encashment taxable in a full and final settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"For a government employee, leave encashment on exit is fully exempt. For a non-government employee, it is exempt up to a lifetime limit of Rs. 25 lakh under Section 10(10AA) of the Income Tax Act, 1961, raised from Rs. 3 lakh with effect from 1 April 2023. Amounts above the limit are taxed as salary.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"How is the settlement amount calculated?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Add the earned components (salary for days worked, leave encashment on the daily basic-plus-dearness-allowance rate, and gratuity at 15\/26 of last drawn basic-plus-dearness-allowance per completed year), then subtract lawful deductions and tax at source. Each earned head runs on its own basis rather than a single formula.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What is the penalty if an employer delays or shorts the settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Section 54 of the Code on Wages makes an employer who pays less than the amount due liable to a fine up to Rs. 50,000. A repeat within five years raises the exposure to imprisonment up to three months, or a fine up to Rs. 1,00,000, or both.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"What can an employee do if the settlement is withheld?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Raise a claim before the authority appointed under the Code on Wages, which can direct payment of the amount due with compensation. Sending a lawyer's notice first, then approaching the labour commissioner, and finally the court, is the usual escalation where the employer refuses.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Did the 2026 labour codes change full and final settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Yes. The main change is the two-working-day deadline on the wages component under Section 17(2). Alongside it, the Code on Wages 50 percent rule enlarges the basic-plus-dearness-allowance base on which leave encashment and gratuity are computed, so several settlement amounts rise.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Does the two-day rule apply to fixed-term and contract employees?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"Yes. Section 17(2) reads across contract types, so fixed-term, contract and permanent employees are all entitled to their wages within two working days of exit. Apprentices are the usual exception.\"\n      }\n    },\n    {\n      \"@type\": \"Question\",\n      \"name\": \"Is the relieving letter linked to the settlement?\",\n      \"acceptedAnswer\": {\n        \"@type\": \"Answer\",\n        \"text\": \"The two are separate obligations. The wages part of the settlement is now due within two working days of exit regardless of when the relieving letter is issued, and an employer cannot lawfully withhold statutory dues merely to hold the settlement as leverage.\"\n      }\n    }\n  ]\n}\n<\/script>\n\n\n<style>.ls-cta-br{display:none;}@media(max-width:768px){#ls-floating-cta{padding:8px 12px !important;}#ls-floating-cta .ls-wrap{flex-direction:column !important;align-items:center !important;gap:8px !important;}#ls-floating-cta a{font-size:11px !important;padding:8px 16px !important;white-space:normal !important;text-align:center !important;max-width:90vw !important;}.ls-cta-br{display:block !important;}}<\/style><div id=\"ls-floating-cta\" style=\"position:fixed;bottom:0;left:0;right:0;z-index:9999;background:#0f0f0f;border-top:3px solid #E8382D;padding:12px 20px;box-shadow:0 -4px 20px rgba(0,0,0,0.3);\"><div class=\"ls-wrap\" style=\"display:flex;align-items:center;justify-content:center;gap:24px;\"><div style=\"display:flex;align-items:center;gap:10px;\"><a href=\"https:\/\/growthx.lawsikho.com\/f\/13may-cd-21day-freelance?p_source=cd2_blog_ls&#038;p_cta=cd-full-and-final-settlement-india\" onclick=\"gtag(&#039;event&#039;,&#039;cta_click&#039;,{send_to:&#039;G-3XDT1KHB05&#039;,p_source:&#039;cd2_blog_ls&#039;,p_cta:&#039;cd-full-and-final-settlement-india&#039;});\" target=\"_blank\" rel=\"noopener\" style=\"display:inline-block;background:#E8382D;color:#fff;padding:11px 20px;border-radius:7px;font-size:13px;font-weight:700;text-decoration:none;white-space:nowrap;\">Draft contracts clients pay for \u2014<br class=\"ls-cta-br\"> in 3 weeks, Rs. 100 \u2192<\/a><button onclick=\"document.getElementById('ls-floating-cta').style.display='none'\" style=\"background:none;border:none;color:#555;font-size:18px;cursor:pointer;padding:4px;line-height:1;position:absolute;right:16px;\">\u2715<\/button><\/div><\/div><\/div>\n","protected":false},"excerpt":{"rendered":"<p> Full and final settlement nets earned salary, leave encashment, gratuity and bonus against deductions. 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