When an employee resigns or terminates from an organization, employees undergo a process which is known as the full and final (FnF) settlement. At this time, the employee gets paid for the last working month plus any additional earnings(Leave encashment, gratuity, etc) or deductions. This procedure is carried out by the employer after the employee resigns from their services.
The procedure of FnF is conducted based on guidelines defined in the exit policy of any organization.
When should the full and final settlement happen?
According to the guideline and law, the full and final settlement should be paid to the employee within 10 days from employee's last working day. The process of exit clearance should start by the employer before 5 to 6 days of last working day, by getting the clearance process started while an employee in service helps to clear mutual understanding between employee and employer.
What are the major components of the full and final settlement (FnF)?
The full and final settlement includes the unpaid salary for the number of days for which the employee has worked till his last working day. Unpaid salary includes any arrear unpaid salary due from resignation date notice served, any annual benefits, like LTA, accumulated unclaimed CTC reimbursements.
Any unpaid leave dues should be paid in the full and final settlement.
Payment for un-availed leaves (earned or privilege leave) has to be calculated based on company policy. The leave encashment are paid per day Basic or as per fixed amount defined by company.
Calculation of per day basic:
Number of days of un-availed leaves * Last drawn Basic salary / 26 days
For example: If an employee has 20 earned leaves which is un-availed and fixed Basic salary is Rs.10,000 per month, then leave encashment amount will be;
(20*10000)/26 = Rs.7692
Deductions include Provident Fund, ESIC, Profession Tax, Income Tax calculated on unpaid salary and compensation for Notice Period not served, recovery of pending advances paid, or loans if any.
The major challenge is getting employee tax-saving proof to calculate accurate income tax amount in the full and final settlement. Most employees submits tax saving proof at end of the financial year, but for resigned employee its always better to get during exit formalities. By doing this employer will not have to reprocess the resigned employee's payroll again in March(end of the financial year).
Towards the Statutory Compliance part for FnF, What should an employer take care?
Provident fund claims: Help employee in getting PF claim withdrawal or transferred to the new entity. For this employees, employer need to get the exit details udpated in the EPFO employer portal. Get employee KYC's added and DSC approved with EPFO employer portal.
ESIC: Get employees exit information updated with the ESIC employer portal.
Relieving & Experience Letter: Provide Relieving & Experience Letter to the employee along with FnF settlement.
FnF Settlement Statement: Provide employee with full and final settlement statement along with a final tax computation statement. This document will help the employee to declare their previous employer income with the newly joined employer.
To download a sample Full and Final Settlement statement, then fill in below information and get it in email.