Ask any HR executive which part of an employee’s exit takes the most time, and the answer is usually the money part. A proper full and final settlement calculation needs data from payroll, leave records, the reporting manager, and sometimes even the IT and admin teams. If one number is off, the employee is unhappy and HR ends up redoing everything. This guide walks you through each component, the formula behind it, and a worked example you can copy.

What Goes Into an F&F Settlement?

F&F settlement is the final account between the company and a person who is leaving. It lists everything the employee should receive and everything the employee owes. If you want the basics first, our guide on employee full and final settlement explains the concept in detail. Here, we focus on the numbers.

Every settlement has two sides.

Amounts payable to the employee

• Salary for days worked in the last month
• Leave encashment
• Gratuity, if eligible
• Pending bonus or incentive
• Approved reimbursements
• Notice pay, if the company waives the notice period

Amounts recoverable from the employee

• Notice period shortfall
• Salary advance or loan balance
• Excess leave taken
• Cost of unreturned company assets, if your policy allows it
• TDS and other statutory deductions

The basic full and final settlement calculation formula is simple:

Net F&F amount = Total payable − Total recoverable

If the result is negative, the employee owes money to the company. If positive, the company pays the difference.

Step 1: Calculate Pending Salary

Take the monthly salary and divide it by the number of days in that month (or by 30 or 26, depending on what your payroll follows). Multiply it by the days the employee actually worked.

Pending salary = (Monthly salary ÷ days in month) × days worked

Whichever method you use, use it for every employee. Mixing methods is a common reason for complaints.

Step 2: Calculate Leave Encashment

Check your leave policy first. Many companies allow encashment only for earned or privilege leave, not for sick or casual leave. The usual formula is:

Leave encashment = (Basic salary + DA ÷ 30) × unused leave days

Some companies divide by 26 instead of 30. Again, follow your written policy.

Step 3: Calculate Gratuity

Gratuity is for employees who have completed five years of continuous service. Under the new Code on Social Security, fixed-term employees can become eligible after one year. The standard formula is:

Gratuity = Rate of Wage Last drawn × 15 ÷ 26 × years of service

Years of service are counted in full years. If the employee has worked more than six months in the last year, it is rounded up to the next year. For private sector employees, gratuity up to ₹20 lakh is tax-free.

Step 4: Calculate Notice Period Recovery

If the employee leaves without serving the full notice period, you can recover the shortfall, but only if the appointment letter says so.

Notice recovery = (Monthly Gross Salary ÷ 30) × shortfall days

Always check which salary your contract mentions for recovery: gross, basic, or CTC. Do not guess.

Step 5: Add Other Dues and Deductions

Add approved reimbursements and earned bonus on the payable side. On the recovery side, add any advances, loans, or asset costs. Then deduct TDS as applicable.

A Worked Example

Let’s say Rohit is leaving after 6 years and 3 months. His details are:

• Monthly gross salary: ₹60,000
• Last Drawn Wage: ₹30,000
• Last working day: 20th of a 30-day month
• Unused earned leave: 12 days
• Notice period shortfall: 15 days
• Salary advance pending: ₹10,000
• Approved reimbursement: ₹5,000

Component	Working	Amount (₹)
Pending salary	60,000 ÷ 30 × 20	40,000
Leave encashment	30,000 ÷ 26 × 12	13,846
Gratuity	30,000 × 15 ÷ 26 × 6	1,03,846
Reimbursement	As approved	5,000
Total payable		1,62,692
Notice recovery	60,000 ÷ 30 × 15	30,000
Salary advance	As per record	10,000
Total recoverable		40,000
Net F&F amount	1,62,692 − 40,000	1,22,692

TDS would be adjusted on the taxable part of the settlement before the final payment. Share this kind of breakup with every leaving employee. It removes doubts and saves HR from repeated follow-up calls.

Timeline: What the New Labour Codes Say

Calculating correctly is only half the job. You also have to pay on time. The Code on Wages, 2019 says that when an employee resigns or is removed, dismissed, or retrenched, wages must be paid within two working days. Many companies were used to a 30 to 45 day cycle, so this is a big change.

While updating your full and final settlement policy as per new labour Codes, keep these points in mind:

• Start preparing the settlement before the last working day.
• Collect no-dues clearance from all departments in advance.
• Keep attendance and leave data updated every month, so nothing is pending at exit.
• Recheck your salary structure. The new wage definition expects basic pay, DA, and retaining allowance to be generally at least 50% of total pay, which can change the base for gratuity.

Rules can be updated by the central and state governments, so confirm the latest position with a labour law expert before changing your process.

Mistakes That Affect F&F Accuracy

Using the wrong salary base. Gratuity uses basic plus DA, not gross. Using gross inflates the amount and can create a compliance problem.

Wrong rounding of service years. Six months or less is not counted, and more than six months is rounded up. Check this every time.

Deducting without a clause. Every recovery must be backed by your appointment letter or policy.

Ignoring tax. Leave encashment on resignation by a non-government employee is tax-free up to ₹25 lakh. Anything above that is taxable.

Old rules in the policy. If your exit rules were written years ago, they may no longer match the law. Review your HR Policies every year, and again whenever a major labour law change comes in.

Make F&F Easier With a Fixed Process

The best way to avoid calculation errors is to make the process repeatable. Use one standard F&F template. Keep leave and attendance records clean throughout the year. Assign a clear owner for each step, and set a target date for settlement before the employee’s last day.

Using HRMS software can make this far easier, since leave balance, attendance, loans, and salary data are already in one place and the settlement sheet gets generated with a few clicks.

At Career Creed HR Services, we help startups and growing businesses manage payroll, exits, and compliance through HR outsourcing and HRMS software. If F&F settlements are eating up your team’s time, visit careercreed.com to see how we can help.