This analysis is derived from the official texts and FAQs under:
- Code?on?Wages,?2019
- Code?on?Social?Security,?2020
- Industrial?Relations?Code,?2020
- Respective Central Rules,?2025–26 (including?G.S.R.?342(E)?&?343(E))
## What is full and final settlement?
- Full and final settlement, often called F&F settlement, is the process of clearing all dues payable to an employee when employment ends.
- It generally includes unpaid salary, leave encashment, gratuity where applicable, bonus where applicable, and any lawful deductions.
- Under the new labour code framework, this process is more standardized and timeline-driven than before.
## Which laws govern full and final settlement in India?
- The main legal base comes from the Code on Wages, 2019, especially Section 17(2), which requires wages payable on termination to be paid within two working days.
- The Industrial Relations Code, 2020 and related Central Rules also support payment timelines for dues arising from resignation, dismissal, retrenchment, or closure-related separation.
- Gratuity-related payments are additionally governed by the Code on Social Security, 2020 and its rules.
## What is the time limit for full and final settlement?
- The key rule is that wages due on separation should be paid within two working days from the date of termination or separation.
- This timeline is presented in the Codes as the central compliance standard under the new regime.
- In retirement or superannuation cases, settlement may be completed on or before the last working day when the exit is already known in advance.
## Does this rule apply to all employees?
- Yes, the Codes explains that the Code on Wages applies broadly across sectors and employee categories.
- Coverage extends across manufacturing, IT, services, construction, transport, offices, NGOs, educational institutions, and similar establishments.
- The FAQ content also indicates that permanent, temporary, fixed-term, contractual, and other covered employee categories are included for wage-settlement purposes.
## Do Central Rules apply to every employer in India regarding full and final payment?
- The Codes explains that Central Rules apply where the Central Government is the appropriate government, such as railways, mines, oilfields, major ports, banking, insurance, and certain central public sector units.
- For other establishments, corresponding State Rules apply.
- Even so, the Codes emphasizes that the two-working-day rule remains the core standard across jurisdictions.
## What is included in full and final settlement?
- Unpaid wages or salary up to the last working day.
- Leave encashment, where earned leave is due.
- Gratuity, if the employee is eligible under applicable law.
- Bonus, where payable under the relevant rules or policy.
- Other statutory or contractual dues payable at exit.
## Which salary components are treated as wages?
- Basic pay is included.
- Dearness allowance is included.
- Retaining allowance, where applicable, is included.
- Overtime allowance is also included as per the Codes's summary of the new FAQs.
## Which components are usually excluded from wages?
- Statutory bonus is excluded, subject to the wage-definition framework.
- Employer PF and pension contribution are excluded.
- Gratuity and ESI contribution are excluded.
- House rent allowance, conveyance allowance, commission, incentive, and annual performance bonus are excluded, though the Codes notes that the 50 percent threshold rule may pull excess exclusions back into wages for statutory computation.
## Is leave encashment part of full and final settlement?
- Yes, the Codes states that leave encashment should be paid along with final wages where earned leave is due.
- This makes leave encashment a practical and important part of employee exit calculations.
## Is gratuity paid with full and final settlement?
- Gratuity is part of final dues where the employee is eligible.
- However, the Codes separately notes that gratuity is payable within 30 days from the date it becomes payable under the Social Security framework.
- It also states that the employer should issue the required notice in Form V within 15 days of eligibility determination.
## Is bonus included in the final settlement amount?
- Bonus may be included if it is applicable and payable at the time of exit.
- The Codes also notes that bonus may follow its own statutory payment cycle and, in some cases, can be paid within eight months after the close of the financial year.
## Can employers make deductions during full and final settlement?
- Yes, but only lawful and authorized deductions should be made.
- The Codes specifically notes that fines and recoveries must be authorized and recorded in writing.
- Arbitrary deductions can create compliance risk.
## What should HR teams do to stay compliant?
- Start the F&F calculation immediately after separation.
- Verify unpaid salary, leave balance, deductions, gratuity eligibility, and statutory contributions.
- Release payment through bank transfer or cheque within the required timeline.
- Issue a settlement statement or payslip showing earnings and deductions clearly.
- Maintain digital or written acknowledgment and update wage registers and HR records.
## Are digital records and electronic settlement statements allowed?
- Yes, the Codes notes that employers may issue electronic full and final statements.
- It also highlights the requirement to maintain electronic wage records and display payment-related information through notice boards or HR portals in Hindi, English, and the regional language.
- Digital acknowledgment is presented as acceptable where properly captured.
## Why is timely full and final settlement important?
- It supports legal compliance under the new labour code structure.
- It reduces disputes during employee exits.
- It improves employee experience and strengthens employer credibility.
- It helps HR teams maintain cleaner payroll and audit records.
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