Hello, in this post we will discuss the Full and Final Settlement in payroll.

What is Full and Final Settlement in Payroll?

Full and Final Settlement commonly known as FnF process is done when an employee is leaving the organization. At this time, he/she has to get paid for the last working month + any additional earnings or deductions. The procedure has to be carried out by the employer after the employee resigns from their services.

The procedure of paying and recovering during the resignation process is called the Final Settlement of the employee.

You can relieve the employee first and then do the FnF OR do the final settlement first then relieve the employee. It depends on your company policy.

The major components of FnF are:

  • Unpaid Salary

Unpaid salary includes annual benefits such as LTA (leave travel allowance) and arrears or any salary held due to certain reasons.

  • Leave Encashment

Unpaid leave dues should be paid by or before 7th and 10th of the following month of resignation.

Payment for non-availed leaves (earned or privilege leave) has to be calculated based on company policy. So, the different options for leave encashment are:

  • Per day Basic (Or Basic + DA OR other components)
  • Fixed amount defined by company

Calculation of per day basic:

(number of days of non-availed leaves * basic salary) / 26 days ( Avg paid days in a month).

For e.g., If an employee has 25 earned leaves which is not availed and basic salary = 5000, then encashed amount will be

(25*5000)/26 = Rs. 4807

  • Gratuity

As per Section 7 (3) of the Payment of Gratuity Act 1972, Gratuity should be offered within 30 days of the resignation. If you fail to do so you need to pay with interest.

  • Deductions

Deductions include PF, ESI, PT (if applicable), Income Tax and Compensation for Notice Period not served. Gratuity and encashed earned leave are exempt from tax deducted at source (TDS) as per Income Tax Act. All other payments attract TDS under Section 192 of the Income Tax Act.

When does the settlement happen?

Clearance usually takes time, but it is a policy to clear FnF within 30-45 days after the employee’s last working day.

For gratuity, the stipulation is 30 days after leaving the company, while the bonus must be paid within the specified accounting year.

Points for Employees

  • Make sure to settle any advances taken or ensure it gets adjusted in the final settlement.
  • Make sure to provide all required documents for the process of FnF

Related:

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