Full and Final Settlement (FnF) Policy

Table of Contents

    After an employee resigns from an organization or is terminated, the relevant employee exit process ensues. In India, labor laws oversee and detail the process of how an employee can be terminated or exit from a job.

    Exit procedures differ among companies. Typically, it involves an exit interview, obtaining clearances from various departments, completing the full and final settlement (FnF), and issuing a relieving letter.

     

    What is the full and final settlement or FnF?

    The full and final settlement or FnF policy is an important part of the employee exit process. Its main purpose is the calculation of the final salary including deductions and encashments. It covers provident funds, gratuity, incentives, benefits, bonuses, and more. 

    The full and final settlement must be completed by the employee’s last working day. This process is generally straightforward and should adhere to any guidelines outlined in the employment contract.

     

    Eligibility Criteria

    The eligibility criteria for receiving Full and Final Settlement (FnF) typically depend on the terms specified in the employment contract or company policies. Any employee who no longer works for an organization, regardless of the circumstances, is entitled to receive the Full and Final Settlement (FnF).

    The Full and Final Settlement (FnF) must be completed within two days from the employee’s last working day.

    Components of Full and Final Settlement

    • Salary: The Full and Final Settlement encompasses unpaid salary for the days worked from the resignation date to the last working day. This includes outstanding salary and annual benefits like Leave Travel Allowance (LTA) and arrears. The calculation for arrears involves multiplying the number of days for compensation by the gross salary and then dividing it by 26 (the paid days in a month). Arrears=(Number of days for compensation×Gross Salary)/26
    • Bonuses & Incentives: Several companies provide bonuses and incentives linked to employee performance and the company’s revenue. When an employee leaves the organization, the bonus amount is usually included in the Full and Final Settlement (FnF).
    • Leave encashment: Under Section 79 (11) of the Factories Act 1948, any outstanding leave dues must be settled by the 7th or 10th of the subsequent month following the resignation. The computation of payment for unused leaves, such as earned or privileged leave, is determined based on the company’s leave encashment policy.
    • Employee Provident Fund (EPF): The employer has the responsibility to inform the departing employee about the status of their PF account during the settlement of final dues. Upon retirement, the fund is payable to the employee. In the case of resignation for a new job, the Employee Provident Fund account gets transferred to the new company. The current employer is required to update the employee’s exit date on the EPFO portal.
    • Gratuity: Under Section 7 (3) of the PG Act 1972, Gratuity should be provided within 30 days of separation. If not, it must be paid with interest if the employee has completed four years and 240 days of service.
    • Deductions: Deductions encompass Profession Tax (if applicable), Provident Fund, Income Tax, and Compensation for Notice Period not served. Gratuity and encashed earned leave are exempt or non-taxable from Tax Deducted at Source (TDS) as per the Income Tax Act. For all other payments, TDS applies under Section 192 of the Income Tax Act. According to Section 72 (5) of the E.P.F Act 1952, the employer must submit the E.P.F claim forms within 5 days of the employee’s claim submission.
    • Pension: Employees with at least 10 years of ‘pensionable service’ in your organization qualify for pension benefits. To avail of these benefits, they need to submit their ‘Scheme certificate’ upon retirement or upon reaching 58 years of age.  The pension is typically received through the Employer’s Provident Fund (E.P.S), and the specified minimum pension amount is Rs 1000, while it generally hovers around Rs 7500.

     

    Process for Initiating FnF Settlement

    The Full and Final (FnF) settlement process involves the HR department managing all transactions. The exact process differs according to company policies. However, the basic steps included in this process are as follows.

    • Formal resignation from the employee: When an employee decides to leave the company, they officially submit their resignation. This is usually in the form of an email or a resignation letter directed towards the reporting manager and HR. 
    • Resignation acceptance by the employer and HR: The employer and HR department acknowledge and accept the employee’s resignation formally. This confirms the initiation of the exit process from the employer’s perspective.
    • No dues certificate processed by HR: HR ensures no pending financial or administrative obligations from the departing employee.
    • Verification of leave balance, EPF, gratuity, bonus, etc: HR verifies and calculates the employee’s entitlements, including leave balance, EPF (Employee Provident Fund), gratuity, and any applicable bonuses. This ensures accurate settlement of financial and benefit components.
    • Full and final statement submitted and processed by Finance : The Finance department processes the Full and Final (FnF) settlement, incorporating all verified amounts and financial details. The financial settlement is completed and HR ensures the employee receives their dues accurately and promptly.

     

    Documents required during FnF Settlement

    The following highlights the essential documentation required for the FnF settlement, guiding the preparation and submission of each document. 

    • Resignation letter or termination letter: This document formally communicates the intent to leave and sets the stage for further exit processes.
    • Final salary statement: The final salary statement is a comprehensive record detailing the employee’s earnings, deductions, and allowances for the last pay cycle. It serves as a transparent summary of the financial transactions relevant to the employee’s final days with the organization.
    • No due clearance certificate: Before wrapping up the employment journey, the employee must obtain a no-due clearance certificate. This document, issued by the HR department, confirms that the departing employee has cleared all outstanding dues or responsibilities, ensuring a smooth exit.
    • Form 16: Form 16 is an Indian income tax document issued by employers to employees. It outlines the salary details and tax deducted at source (TDS) for the financial year. When providing the final payslip, the employer should send Form 16 to the employee’s email.
    • Notice period completion approval / relieving letter: For employees who serve a notice period, obtaining notice period completion approval is essential. This approval signifies that the employee has fulfilled the required notice period, completing a significant aspect of the exit process.

    Calculation and Disbursement of FnF

    Below are the formulas for calculating the components adding up to the FnF.

    • Unpaid Salary = (The No. of Days of Compensation x Gross Salary) / 26 ( Avg. working days in a month) 
    • Bonus = Salary (Basic + DA) * Bonus Percentage
    • Leave encashment = Number of days of Unavailed leaves × Basic salary ⁄ 26 days 
    • EPF = 12 % of (basic salary + DA)
    • Gratuity = (Basic salary + Dearness Allowance) × number of years used in service
    • Pension = Employee’s monthly salary = ( pensionable salary * pensionable service) / 70
    • Deductions: Income Tax exemptions apply to encash earned leaves and gratuity. Any other payments received will be subject to taxation. The specific deductions will vary based on the employee’s income bracket.

    However, the recently enacted wage code now requires companies to complete the settlement of final dues within two days from the employee’s last working day.

    Employees with concerns regarding their FNF settlement should reach out to the designated contact person within the HR Department. This individual is responsible for guiding employees through the resolution process.

     

    Payroll Department Responsibilities

    1. Net Pay with Bank Statement: The Payroll Department is tasked with providing the Finance Department with the net pay along with the bank statement by the 5th of every month for employees relieved in the previous month.
    2. F&F Statement Issuance: FnF Statements are to be issued to the employee by the 5th of the succeeding month.
    3. Acknowledgment of Settlement: Payroll should ensure acknowledgment is obtained once the Full & Final Settlement is made.

    Note: Employees are encouraged to refer to their company-specific policies for a detailed understanding of the dispute resolution process.

    Here are the key provisions of the Full and Final Settlement Policy:

    • Payment of all employee dues upon exit (resignation, retirement, termination).
    • Deducts outstanding advances, and taxes.
    • Paid within the timeframe (often 7-10 days).
    • Transparent breakdown provided.
    • Clearance from departments is needed.
    • Signed documents confirm the settlement.
    • Follows local labor regulations.

    Approval

    This Full and Final Settlement Policy is approved by [insert name or position] and is effective from [insert effective date].

    [Signature]

    [Name] [Position]

    [Date]

    Review and Revision

    This policy will be periodically reviewed and updated as necessary to ensure alignment with changing legal requirements and organizational needs.

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