Full and Final Settlement Rules Explained: Exit Salary Payout In 2 Days From April 1

We have often seen scenarios where employees have had to wait for weeks, or even up to 90 days, to receive their dues after resigning or being terminated, causing financial stress and distrust towards organisations. However, this long-standing issue is now being addressed. Under the Code on Wages, 2019, companies are required to complete full and final (FnF) settlements within just two working days of an employee's last working day, effective April 1.

What Is Full And Final Settlement (FnF)?

Full and Final Settlement refers to the process of calculating and clearing all outstanding dues owed to an employee at the end of their tenure with an organisation. It applies to all types of separation, including resignation, termination, retrenchment, retirement, or even death during service.

FnF is not limited to the final month's salary. Instead, it is a comprehensive financial closure that ensures both the employer and employee settle all pending obligations. This includes payments such as gratuity, bonuses, leave encashment, and reimbursements, while also accounting for any deductions or liabilities payable by the employee to the organisation.

The 2-Day Full And Final Settlement Rule

India's new labour codes, which came into effect on November 21, 2025, consolidated 29 existing labour laws into a single framework, governing wages, social security, industrial relations, and working conditions. One of the most significant reforms under this framework is the timeline for employee exit payments.

According to Section 17(2), Code on Wages, 2019, "Where an employee has been removed or dismissed from service, or retrenched or has resigned from service, or became unemployed due to closure of the establishment, the wages payable to him shall be paid within two working days of his removal, dismissal, retrenchment or, as the case may be, his resignation."

Key Components Of Full And Final Settlement

Understanding the various components of an FnF settlement is essential for ensuring accurate calculations, transparency, and compliance with legal requirements. It also helps reduce the likelihood of disputes and ensures a smoother exit process.

•Final Salary: This includes payment for the last working month, calculated on a pro-rata basis depending on the number of days worked. It may also cover additional allowances such as house rent allowance (HRA) or special allowances.

•Leave Encashment: Employees are compensated for unused Earned Leave (EL) or Privilege Leave (PL), typically calculated based on their latest basic salary and leave balance.

•Bonuses and Incentives: Any performance-linked incentives, commissions, or statutory bonuses applicable for the period worked must be included in the settlement.

•Gratuity: Traditionally payable after five years of continuous service, revised provisions allow eligibility in certain cases after just one year. The new framework also mandates that gratuity be paid within 30 days of an employee's qualification and exit, ensuring timely access to this benefit.

•Reimbursements: Any approved business expenses incurred by the employee, such as travel, accommodation, or official purchases, must be reimbursed.

•Deductions: Employers may deduct amounts related to taxes, salary advances, company loans, notice period shortfalls, or unreturned assets, as per company policy and legal provisions.