Does the 2-day rule apply when an employee resigns?

Yes. Unlike the old Payment of Wages Act, section 17(2) of the Code on Wages names resignation expressly. The safer reading is that the two working days run from the last working day — the date the resignation takes effect — not from the day the resignation letter is handed in, because notice-period wages have not been earned until the notice is served.

What is included in a full and final settlement?

Salary for the days worked in the final month, wages for unavailed annual leave, any bonus or incentive due, notice pay if the employer ends the employment without notice, gratuity if the employee qualifies, reimbursements and arrears. Deductions can include advances and loans, income tax and, where the contract allows and the employee agrees, recovery for notice not served.

Can an employer hold back the full and final settlement until the employee completes handover?

Not the wages. The Code sets a fixed deadline of within 2 working days and does not make it conditional on an exit clearance form or the return of a laptop. An employer can recover the value of company property the employee fails to return, through the deductions the Code allows, but it cannot withhold earned wages as leverage.

Is TDS deducted on full and final settlement?

Yes, the settlement is salary income and the employer recomputes tax for the year under section 392 of the Income-tax Act, 2025. Gratuity up to ₹20 lakh and leave encashment up to ₹25 lakh on retirement or resignation are exempt for private-sector employees. Many mid-year leavers have little or no TDS in the final month.

What happens if the employer delays the full and final settlement?

The employee can file a claim before the authority under the Code on Wages within 3 years. The authority can order payment plus compensation of up to 10 times the claim, and late payment of wages is an offence punishable with a fine of up to ₹50,000 for a first offence. Delayed gratuity carries interest.

HR, payroll & labour

Full and Final Settlement in 2026: The 2-Working-Day Rule, Components, Deductions and a Worked Calculation

Full and final settlement in 2026: the 2-working-day rule under the Code on Wages, every component, deductions, TDS and a worked ₹ calculation for employers.

Edited by Sumeet YadavFounder & editor, MSMETOOLS · fact-checked against official sources

Updated October 2026 Verified against official sources 11 October 2026 19 min read

Full and final settlement — MSMETOOLS guide cover

Contents (10)

1. What full and final settlement means now
2. When the two working days start
3. Components of a full and final settlement
4. What you can deduct — and what you cannot
5. Gratuity: a separate 30-day process
6. Provident fund, ESI and the paperwork that goes with the money
7. Worked example: a full and final settlement in ₹
8. How TDS works on the settlement
9. Common mistakes and how disputes get resolved
10. What to do next

When an employee leaves, the last payment you make is the one most likely to end up before a labour authority. Since the labour codes took effect, the deadline is no longer "30 to 45 days as per company policy" — it is two working days. This guide is for business owners, HR and payroll staff who process exits, and for employees checking what they should receive. You'll get the legal deadlines for each component, what goes in and what can come out, how tax works on the settlement, and a full ₹ calculation you can follow line by line.

Quick answer

A full and final settlement (F&F) is the last payment of everything owed to an employee who leaves. Under section 17(2) of the Code on Wages, in force since 21 November 2025, the wages of an employee who resigns, is removed, dismissed or retrenched, or loses the job on closure must be paid within 2 working days. Gratuity follows its own clock — payment within 30 days of the employee's claim.

Include: salary to the last day, unavailed-leave wages, bonus or incentive due, notice pay (if you end the job without notice), gratuity, reimbursements
Deduct only what the Code allows: advances, loans, income tax, PF/ESI, and losses caused by the employee
Gratuity up to ₹20 lakh and leave encashment up to ₹25 lakh are tax-free for private-sector staff
Give a final pay slip, the settlement statement and a service certificate

What full and final settlement means now

Full and final settlement is the process of closing every money account between an employer and an employee when the employment ends. It is not one payment type in law; it is a bundle. Each part of the bundle — wages, leave, bonus, gratuity, provident fund — comes from a different law with its own deadline, and the settlement statement simply brings them together on one sheet.

Until November 2025 most private employers in India ran F&F on a policy timeline of 30, 45 or even 60 days after the last working day. The old Payment of Wages Act did require payment within two days of termination by the employer, but it said nothing about resignations and covered only employees below a wage ceiling, so companies treated resignations as policy territory. The Code on Wages, 2019 changed that. Section 17(2) covers an employee who "has been removed or dismissed from service or retrenched or has resigned from service, or became unemployed due to closure of the establishment", and says the wages payable shall be paid within two working days. There is no wage ceiling: it applies to a ₹15,000 shop assistant and a ₹3 lakh-a-month manager alike.

Someone typing a search on how to write a resignation letter on a laptop — Most settlements start with a resignation. Under the Code on Wages, resignation now carries the same two-working-day payment deadline as dismissal or retrenchment.· Image: CIPHR Connect (Flickr) (CC BY 2.0)

The Code came into force on 21 November 2025 together with the other three labour codes. Section 17(3) lets the appropriate government prescribe a different limit, but the central wage rules notified on 8 May 2026 do not set one, and section 17(4) says the timelines do not override other laws. If your state's rules under the Code fix a different period, follow the state rules; otherwise plan for two working days.

When the two working days start

The Code counts from the "removal, dismissal, retrenchment or, as the case may be, his resignation". Read literally, the clock for a resignation could start on the day the employee hands in the letter. That reading does not work when the employee then serves a notice period of 30, 60 or 90 days, because the wages for the notice period have not yet been earned. Commentators, including a detailed LiveLaw analysis published in October 2026, take the practical view that the two days run from the date the resignation takes effect — the last working day. That is also how the Model Standing Orders, 2026 put it for terminations: wages and other dues must be paid "before the expiry of the second working day from the date of termination".

"Working days" are days your establishment works, so a weekly off or a declared holiday does not count. If an employee's last day is a Friday and Saturday and Sunday are off, the deadline runs to the end of Tuesday. Build your exit process backwards from that date: attendance closed, recoveries agreed and the payment file ready before the employee walks out.

Deadlines on exit

Last working day

Close attendance, collect assets, issue the settlement statement

Within 2 working days

Pay final wages, unavailed-leave wages, notice pay, incentives and other dues (Code on Wages s.17(2); OSH Code s.32)

Within 10 days

Service certificate where the Model Standing Orders apply

Within 15 days of a gratuity claim

Employer issues Form V notice with the amount and payment date

Within 30 days of a gratuity claim

Gratuity paid by bank credit or demand draft

Within 2 months

Unavailed-leave wages on superannuation or death (OSH Code s.32)

Components of a full and final settlement

Salary for the final month. Pay for the days worked up to and including the last working day, at the full monthly rate of every component, less loss-of-pay days. Use the same day-count method your payroll uses every month — calendar days or 26 — and apply it consistently. Overtime for the final period is paid at twice the normal rate of wages.

Wages for unavailed leave. Section 32(1)(vi) of the Occupational Safety, Health and Working Conditions Code says a worker who is discharged, dismissed or quits, or who retires or dies, is entitled to wages for the leave due, and that on discharge, dismissal or quitting the payment must be made before the expiry of the second working day. So leave encashment moves on the same two-day clock as wages. The OSH Code leave rules apply to "workers", which excludes managers and supervisors drawing more than ₹18,000 a month, but your state Shops and Establishments Act or your own leave policy usually gives managers the same right. Our leave encashment guide explains how to count the balance and value each day.

Notice pay. If you end the employment of a permanent worker without the notice the contract or standing orders require, you owe wages in lieu of notice. Where the Model Standing Orders apply, that is one month's notice or wages in lieu. Notice pay runs on the two-day deadline because it replaces wages.

Bonus and incentives. Statutory bonus under the Code on Wages is due to employees whose wages are up to ₹21,000 a month and who worked at least 30 days in the accounting year, at 8.33% of wages or ₹100, whichever is higher to 20% of wages of wages. Strictly, the Code lets you pay it within 8 months of the close of the accounting year, but many employers clear the pro-rata amount in the settlement so the file can close. A contractual incentive or variable pay that has already fallen due under its own terms is part of wages and should be paid within two days. See our bonus guide.

Gratuity. An employee with 5 years of continuous service — or a fixed-term employee with 1 year — gets 15 days' wages for each completed year, using the 15/26 formula, capped at ₹20 lakh. Gratuity is not "wages" under the Code on Wages, so it does not fall under the two-day rule. Rule 33 of the Social Security (Central) Rules, 2026 sets its own steps, explained below. Our gratuity calculator guide has the formula and examples.

Retrenchment compensation. If you retrench a worker with at least one year of continuous service, the Industrial Relations Code requires compensation of 15 days' average pay for every completed year of service (or part over six months), plus a separate contribution of 15 days' last-drawn wages to the re-skilling fund for each retrenched worker. These are not part of a normal resignation settlement.

Reimbursements and arrears. Approved travel claims, phone bills, salary arrears from a revision, and any amount you deducted earlier and now owe back.

Exit numbers to know (2026)

2 working days

Final wages and leave dues

Code on Wages s.17(2); OSH Code s.32

30 days

Gratuity after the Form IV claim

SS (Central) Rules r.33

₹20 lakh

Tax-free gratuity (lifetime)

₹25 lakh

Tax-free leave encashment (lifetime)

What you can deduct — and what you cannot

Section 18 of the Code on Wages is a closed list. You may deduct fines imposed under the Code's procedure, deductions for absence, damage or loss of goods or money entrusted to the employee and caused by their neglect or default, housing and amenities the employee accepted, recovery of advances and loans and interest on them, income tax, provident fund and ESI contributions, deductions ordered by a court, and a few others. Total deductions in a wage period cannot exceed 50% of wages.

In a settlement that list covers most of what employers want to recover. A salary advance, an outstanding personal loan, the value of a company laptop the employee did not return (as a loss caused by default, after giving them a chance to explain), and the month's PF, ESI and TDS can all come off.

Notice-period shortfall is the hard one. Most employment contracts say an employee who leaves without serving full notice must pay wages for the shortfall, and HR teams routinely net that amount off the settlement. The Code's list of authorised deductions does not mention notice pay. The cleaner approach is to calculate the shortfall, show it on the statement, and get the employee's written agreement to adjust it against the settlement — or ask the employee to pay it separately. If the employee disputes it, pay the undisputed wages on time and pursue the contract claim separately rather than holding the whole settlement. On the GST side, CBIC Circular 178/10/2022-GST clarified that notice-pay and bond recoveries from employees are not consideration for a supply, so no GST is charged on them.

What you cannot do is hold the settlement hostage. A no-dues form, a handover checklist or an exit interview is a sensible process, but the Code does not make payment conditional on any of them. Withholding earned wages because a laptop is late or because the employee joined a competitor exposes you to a claim for the wages plus compensation.

Settlement items and their deadlines

Item	Law	When to pay
Final month's salary	Code on Wages s.17(2)	within 2 working days
Unavailed annual leave	OSH Code s.32(1)(vi)	Before the second working day (2 months on retirement/death)
Notice pay (employer ends job)	Contract / Model Standing Orders	With final wages
Incentive already due	Contract — part of wages	With final wages
Statutory bonus	Code on Wages Ch. IV	within 8 months of the close of the accounting year (often paid in F&F)
Gratuity	Code on Social Security s.53; SS Rules r.33	Within 30 days of the Form IV application
PF and pension	EPF Scheme — paid by EPFO	Employee claims online; employer marks exit date

Final month's salary

Law: Code on Wages s.17(2)
When to pay: within 2 working days

Unavailed annual leave

Law: OSH Code s.32(1)(vi)
When to pay: Before the second working day (2 months on retirement/death)

Notice pay (employer ends job)

Law: Contract / Model Standing Orders
When to pay: With final wages

Incentive already due

Law: Contract — part of wages
When to pay: With final wages

Statutory bonus

Law: Code on Wages Ch. IV
When to pay: within 8 months of the close of the accounting year (often paid in F&F)

Gratuity

Law: Code on Social Security s.53; SS Rules r.33
When to pay: Within 30 days of the Form IV application

PF and pension

Law: EPF Scheme — paid by EPFO
When to pay: Employee claims online; employer marks exit date

Gratuity: a separate 30-day process

Rule 33 of the Social Security (Central) Rules, 2026 lays out the steps. The employee — or a nominee or legal heir if the employee has died — applies to the employer in Form IV, ordinarily within 30 days of gratuity becoming payable; a late application is still valid if there is sufficient cause. Within 15 days of receiving it, the employer must issue a notice in Form V either stating the amount and fixing a payment date, or giving reasons for rejecting the claim. The payment date must be no later than the 30th day after the application, and payment goes by bank credit or demand draft.

In practice, good employers don't wait for the form. If the employee qualifies, compute gratuity on the last drawn wages and pay it with the settlement. Delay beyond the due date attracts simple interest at the rate notified under the Code on Social Security — currently 12% a year (simple) — and an employee who disagrees with the amount can approach the competent authority.

Remember that gratuity is worked out on wages as the codes define them: basic pay, dearness allowance and retaining allowance, plus the part of excluded allowances such as HRA and conveyance that exceeds half of total pay. A settlement that uses basic alone may be short.

Provident fund, ESI and the paperwork that goes with the money

The PF balance is not paid by the employer. EPFO pays it to the employee on a claim, so your job is to deposit the final month's contributions by the due date, mark the date of exit on the EPFO portal so the employee can transfer or withdraw, and tell the employee when you have done it. An employee who is out of work can draw the full balance only after 12 months of unemployment; most simply transfer it to the next employer. Our PF withdrawal rules page has the claim steps.

The documents an employee should leave with are the settlement statement showing every earning and deduction, the final salary slip for the last month, a relieving letter accepting the resignation, and an experience or service certificate. Where the Model Standing Orders, 2026 apply, a worker is entitled to a service certificate stating the nature of work, designation and period of employment within ten days of leaving. Our experience letter guide covers the wording. The annual TDS certificate (Form 130 under the Income-tax Act, 2025, formerly Form 16) follows after the year ends.

Stacked office inbox trays holding papers and files — Close attendance, recoveries and approvals before the last working day — two working days leaves no room for a file that is still moving between desks.· Image: Khairil Yusof (Wikimedia Commons) (CC BY 2.0)

Worked example: a full and final settlement in ₹

Neha is an accounts executive at a manufacturing MSME in Pune. She joined on 1 August 2019, resigned with a two-month notice requirement, and agreed with her manager on a last working day of 15 October 2026. Her monthly pay is basic ₹30,000, HRA ₹12,000 and conveyance ₹3,000 — gross ₹45,000. She has 18 days of earned leave in the balance and a salary advance of ₹10,000 outstanding.

First, work out her wages under the codes. HRA and conveyance are excluded items totalling ₹15,000, which is less than half of ₹45,000, so nothing is added back and her wages are ₹30,000. That figure drives leave encashment (under the company's policy, which values leave on wages) and gratuity.

Final salary: October has 31 days and her employer prorates on calendar days, so 15 days earn ₹45,000 × 15 ÷ 31 = ₹21,774. Leave encashment: the policy pays wages ÷ 26 per day, so ₹30,000 ÷ 26 × 18 = ₹20,769. Gratuity: from 1 August 2019 to 15 October 2026 is seven years and about two and a half months. The extra part-year is under six months, so it is ignored: ₹30,000 × 15 ÷ 26 × 7 = ₹1,21,154. Neha's wages are above ₹21,000 a month, so statutory bonus does not apply, and she had no incentive due.

Deductions: employee PF on the 15 days' wages of ₹14,516 (₹30,000 × 15 ÷ 31) at 12% is ₹1,742. Maharashtra professional tax for October is ₹200 a month (₹300 in February). The ₹10,000 advance is recovered. Neha served her full notice, so there is no shortfall.

Neha's full and final settlement

Earnings	₹	Deductions	₹
Salary, 1–15 Oct (15/31)	21,774	Employee PF	1,742
Leave encashment, 18 days	20,769	Professional tax	200
Gratuity, 7 years	1,21,154	Salary advance	10,000
		TDS	0
Total	1,63,697	Total	11,942
		Net payable	1,51,755

Salary, 1–15 Oct (15/31)

₹: 21,774
Deductions: Employee PF
₹: 1,742

Leave encashment, 18 days

₹: 20,769
Deductions: Professional tax
₹: 200

Gratuity, 7 years

₹: 1,21,154
Deductions: Salary advance
₹: 10,000

₹
Deductions: TDS
₹: 0

**Total**

₹: 1,63,697
Deductions: Total
₹: 11,942

₹
Deductions: Net payable
₹: 1,51,755

Check the 50% cap: the deductions (PF, PT and the advance, ₹11,942) are well below half of the wages payable in the settlement — ₹42,543 for salary and leave — so the advance can come off in one go. If it hadn't fitted, the balance would have to be recovered another way, because there is no "next month" to carry it to.

Tax: Neha's salary from April to September was ₹2,70,000, and with October's ₹21,774 her taxable salary for the year from this employer is about ₹2.92 lakh before the standard deduction. Leave encashment on resignation is exempt within the limits, and gratuity is exempt up to ₹20 lakh. Her income is far below the ₹12 lakh rebate limit under the new regime, so TDS on the settlement is nil.

The wages, leave encashment and notice-related items must reach her bank account by the end of the second working day after 15 October 2026. Gratuity can follow within the rule 33 timeline, but paying it in the same transfer saves paperwork and interest risk.

How TDS works on the settlement

The settlement is salary for tax purposes. Section 16 of the Income-tax Act, 2025 treats gratuity and payment for leave not availed as salary, and the employer deducts tax under section 392 (formerly section 192) by recomputing the employee's estimated income for the year and deducting the balance due in the final payment.

Two exemptions matter. Gratuity is exempt up to ₹20 lakh over a lifetime for private-sector employees. Leave encashment received on leaving is exempt up to the least of the actual amount, ten months' average salary, the cash value of leave (at most 30 days for each year of service) and ₹25 lakh. Both exemptions sit in section 19 of the 2025 Act, and section 202 — the new regime — does not exclude them, so they are available whichever regime the employee chose. Leave encashed while still in service gets no exemption.

Estimate TDS on the final settlementEnter the year's salary from this employer to check the tax under either regime.

Because the employer recomputes on actual pay to the exit date, the final month often carries little or no TDS. Take Arjun, a sales head on ₹2,50,000 a month who leaves on 30 September 2026 with a ₹1,00,000 ex-gratia payment. His taxable salary from this employer for the year is ₹15,00,000 plus ₹1,00,000, less the ₹75,000 standard deduction: ₹15,25,000. New-regime tax is ₹20,000 + ₹40,000 + ₹48,750 = ₹1,08,750, plus 4% cess = ₹1,13,100. His employer had been deducting about ₹39,650 a month on a full-year projection and has already deposited roughly ₹2,37,900. No further TDS is due, and the excess is claimed as a refund in Arjun's return — an employer cannot normally hand back tax it has already deposited. Arjun should give his next employer the details of this salary and TDS so that tax on the rest of the year is computed on the combined figure. Our TDS on salary guide and TDS calculator help with the arithmetic.

Full and final settlement checklist

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Common mistakes and how disputes get resolved

Running F&F on a 45-day policy. This is the most common breach in 2026. Change your exit policy, your payroll calendar and any offer-letter wording that promises "settlement within 45 days".

Making payment conditional on clearance. Collect assets and sign-offs during the notice period, not after. If something is missing at the end, recover its value through an authorised deduction or a separate claim — don't sit on the wages.

Valuing leave or gratuity on basic alone. If excluded allowances exceed half of pay, the add-back increases wages and therefore both leave encashment and gratuity. Run the 50% test for every leaver.

Forgetting fixed-term staff. A fixed-term employee whose contract ends gets gratuity after 1 year of service, pro rata. Their settlement is due on the same timelines when the contract expires.

Netting notice shortfall without consent. Keep the agreement in writing or pay in full and recover separately.

When an employee isn't paid, the usual route is a claim before the authority appointed under the Code on Wages, which must be filed within 3 years. The authority can direct payment of the amount due and compensation of up to 10 times the claim. Gratuity disputes go to the competent authority under the Code on Social Security, and a missing service certificate can be raised with the labour inspector. Most disputes settle once the employer sees the claim, so a clear statement issued on the last day is the best protection for both sides.

Official links

What to do next

Rewrite your exit policy around the two-working-day deadline, then build a one-page settlement template with the earnings, deductions and tax lines from the example above. Generate the final payslip with our free salary slip generator, check gratuity with the gratuity guide, and issue the experience letter on the same day you pay.

This is general information, not legal or tax advice — confirm on the official source or with a professional.

Frequently asked questions

Section 17(2) of the Code on Wages, in force since 21 November 2025, says wages of an employee who resigns, is removed, dismissed or retrenched, or loses the job because the establishment closes must be paid within 2 working days. The OSH Code sets the same deadline for unavailed leave. Gratuity has its own timeline — within 30 days of the employee's application.

Sources & verification

Figures on this page were checked against the sources below when it was last reviewed on 11 October 2026. Each rate and limit is stored once with its own official source and review date, and official update channels are monitored daily so changes are picked up. How we verify

1.The Code on Wages, 2019 — section 17 (time limit for payment of wages) — AdvocateKhoj (bare Act text) · accessed 11 October 2026
2.The Code on Wages, 2019 (No. 29 of 2019) — India Code, Legislative Department · accessed 11 October 2026
3.Occupational Safety, Health and Working Conditions Code, 2020 — section 32 — Directorate General of Mines Safety (text of the Act) · accessed 11 October 2026
4.Social Security (Central) Rules, 2026 — G.S.R. 344(E), 8 May 2026 — Ministry of Labour and Employment (Gazette of India) · accessed 11 October 2026
5.Model Standing Orders, 2026 — S.O. 2312(E), 8 May 2026 — Ministry of Labour and Employment (Gazette of India) · accessed 11 October 2026
6.The Income-tax Act, 2025 (Act No. 30 of 2025) — Legislative Department (Gazette of India) · accessed 11 October 2026
7.Government announces implementation of the four Labour Codes — PIB — Ministry of Labour & Employment · accessed 11 October 2026
8.Two Working Days: Code On Wages And Employee's Final Settlement — LiveLaw · accessed 11 October 2026
9.CBIC clarifies GST applicability on liquidated damages (Circular 178/10/2022-GST) — EY India · accessed 11 October 2026

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