Employee Exit and Settlement in India: A Complete Guide
Full and final settlement, gratuity, leave encashment, notice pay recovery, relieving letters and UAN transfer when an employee leaves.
Employee exit is more than a resignation letter. It involves notice period, full and final settlement (F&F), gratuity, leave encashment, recovery of dues, relieving documents and PF/UAN transfer. This guide covers each step for a compliant exit process.
What is a full and final settlement checklist?
The F&F process closes all financial and legal matters between the employer and the employee. A standard checklist includes:
- Resignation acceptance and last working day.
- Notice period or notice pay recovery.
- Calculation of unpaid salary up to the last working day.
- Leave encashment for accumulated leave.
- Gratuity, if eligible.
- Recovery of advances, loans or asset dues.
- Employer PF contribution until the last month.
- TDS on F&F payments.
- Relieving letter and experience certificate.
- UAN transfer or PF withdrawal.
When is gratuity payable?
Gratuity is payable when an employee leaves after at least five years of continuous service. Exceptions apply in case of death or disablement. The formula is:
Gratuity = (Last drawn basic × 15 × completed years of service) / 26
The tax-exempt amount is capped at ₹20 lakh.
How is leave encashment taxed?
Leave encashment is payment for accumulated leave balance at the time of exit. For non-government employees, the exemption is up to ₹25 lakh under Section 10(10AA). Any amount above that is taxed as salary.
What is notice pay recovery?
If an employee leaves without serving the agreed notice period, the employer can recover the shortfall from the F&F amount. Similarly, if the employer waives notice, it may pay notice pay in lieu. This amount is taxable.
What is a relieving letter?
A relieving letter confirms that the employee has been released from duties on a specific date. It is required by the next employer to verify that the candidate is no longer employed and to avoid double employment.
What onboarding documents are checked during exit?
During exit, the employer should verify:
- Returned company assets (laptop, phone, ID card).
- Handover notes and knowledge transfer.
- Signed non-disclosure or non-compete agreements.
- Pending expense claims or advances.
- Final attendance and leave records.
How is UAN transferred?
The Universal Account Number (UAN) stays with the employee for life. When joining a new employer, the employee gives the UAN and the new employer links it through the EPFO portal. The old PF balance can be transferred online using the EPFO member portal or the UMANG app.
What is Form 12B?
Form 12B is used when an employee changes jobs during a financial year. It gives the new employer details of salary, tax deducted and tax-saving investments from the previous employer. This helps the new employer calculate correct TDS for the remaining months.
Worked example
An employee resigns with a basic salary of ₹30,000 and 7 completed years of service. They have 18 unused earned leave days and an earned leave balance encashment value of ₹20,000.
- Gratuity: (30,000 × 15 × 7) / 26 = ₹1,21,154
- Leave encashment: ₹20,000 (exempt up to ₹25 lakh)
- Salary for 10 final working days: ₹10,000
- Recovery for unreturned advance: ₹2,000
- Net F&F: ₹1,21,154 + ₹20,000 + ₹10,000 − ₹2,000 = ₹1,49,154
Frequently asked questions
- When is full and final settlement paid?
- It should be paid within a reasonable time after the employee's last working day. Many states require it within 15 to 30 days.
- Is gratuity taxable?
- Gratuity is tax-exempt up to ₹20 lakh under Section 10(10). Any amount above that is taxable.
- What is the leave encashment exemption limit?
- Leave encashment on retirement or resignation is exempt up to ₹25 lakh for non-government employees.
- What is Form 12B?
- Form 12B is submitted by a new employee to declare salary and TDS details from previous employers for the same financial year.