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Full and Final Settlement Letter: Format & Exit Clearance Guide

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Full and final settlement (FNF) is a standard process that firms follow to settle outstanding payments with a departing employee.

The FNF process is a formal process that confirms an employee’s resignation from an organization. This process includes paying salary up to the last working day and settling other loans/recovery payments with employees. HR representatives send the full and final settlement letter to employees, formally concluding the resignation process.

In this guide, you will learn more about the importance, format, and best practices for writing a full and final settlement letter. We have also provided a compliance checklist for error-free full and final settlement.

What is a Full and Final (FNF) Settlement Letter?

A full and final (FNF) settlement letter is a document that formally concludes the full and final settlement process. The letter outlines all the calculations related to the full and final settlement process according to company policy and labor laws. It also lists all the payments owed to the employee.

The FNF letter is a legal document that employees and employers can use as a point of reference in case of any disputes. Now, let’s explore the major components of an FNF letter.

Full and Final Settlement Letter Word Format & Mail Template

Here is a standard full and final settlement letter format for Indian businesses. The format can vary on the basis of different regional regulations in other countries.

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Major Components & Activities Included in the FNF Settlement

Here is a list of all the major activities and components included in a full and final settlement process. The major activities include clearances from HR, finance, and administration.

1. Admin Clearance

In this process, an employee returns all the assets, such as laptops or other devices, to the admin department of the organization. In case any of the devices or assets are harmed or damaged, the employee can be held responsible.

2. Finance Clearance

As we mentioned earlier, the final settlement is conducted to ensure that there are no unpaid dues between the employee and the organization. The finance department verifies that the employee is paid their due salary, bonus, leave encashment, pension, gratuity, among others.

3. HR Clearance

The HR department ensures that the final settlement only happens when the employee has completed their notice period. In case the employee doesn’t wish to complete the notice period and wants to leave early, then, according to company policies, HR may ask the employee to compensate the organization for not serving the notice period. Apart from all this, the HR department also holds the exit interview on the last day of the employee’s last working day.

What is the FNF Settlement Process after Resignation?

A full and final settlement is not just a single-step process; it includes multiple steps and requires a considerable amount of time to complete. The following are the steps of the full and final settlement process:

Step 1: Resignation or Termination Application

The first step of this process starts when an employee applies for resignation or is informed about their termination. In both cases, a resignation letter or termination letter is drafted and sent to the HR department or the supervisor for their approval.

Step 2: Acceptance Letter for Resignation

In this step, the employee hands the resignation letter to the HR department. Subsequently, an HR representative sends an acceptance letter if the department accepts the employee’s resignation.

Step 3: Verification by HR Department

Once the resignation acceptance letter is sent to the employee, it confirms that the employee is leaving, and their verification process starts by getting all the clearances mentioned above. Employees have to get these clearances and send them to the HR department for verification.

Step 4: Calculation of Final Payroll

After verifying employee details, HR checks the employee’s leave balance, unpaid salary, gratuity, bonuses, and calculates these to get the final amount payable to the employee.

Outstanding Salary and Benefits

This includes salary up to the last working day, and other benefits such as Leave for travel allowance (LTA). Also, the Payment of Wages act mandates that the outstanding salary should be cleared by the seventh or 10th of the following month.

Unavailed Leaves and Bonuses

Unavailed leaves and bonuses consist of earned unused earned leaves, and bonuses such as performance bonuses among others.

Provident Fund and Pension

Properly calculating PF or provident fund is legally important. Also, organizations need to calculate pension amounts under schemes such as NPS.

Gratuity

It is necessary to account for gratuity under The Payment of Gratuity Act. An employee who has worked for 5 years is eligible to receive gratuity from an employer. Organizations need to pay the gratuity amount within 30 days of the last working day.

Tax Deductions

Organizations also need to ensure that employees get the deducted amount for the tax deducted at source. However, gratuity and leave encashment are usually exempt under the Income Tax Act 1961.

Leave Encashment

The Factories Act 1948 provides for encashment of earned/privilege leaves. The value of leave encashment varies on the bases of company policies and labor laws.

Step 5: Preparation of Settlement Agreement

A settlement agreement is prepared by the HR department after verifying all details and getting a final amount payable to the employee. A settlement agreement should include all calculations regarding the employee’s payroll.

Step 6: Issuing of Cheque

Once the settlement agreement is prepared, it is sent to the finance or accounts department for further processing. In this process, the accounts department will prepare a check for the amount mentioned in the settlement agreement and send it to the employee along with a copy of the full and final statement.

What is the Importance of a Full and Final Settlement Letter?

A FNF settlement letter is important for four reasons:

1. Compliance: Laws such as The Payment of Wages Act and The Shops and Establishments Act provide specific conditions related to the final settlement of payments.
2. Clarity: Such a letter clearly communicates the terms and conditions of the FNF process.
3. Resolve disputes: As a full and final settlement letter is a legal document, it acts as proof for both employees and employers.
4. Record keeping: HR representatives can use the FNF letters in compliance audits. They can also use these records for analysing turnover rates.

What Things Should be Included in the FNF Settlement Letter?

A full and final settlement letter is an important document from a compliance perspective. So, HR professionals should make sure to include the following five details in any FNF letter

1. Settlement Details: Include settlement details related to outstanding payments.
2. Settlement Cheque: Mention the settlement cheque details, including the last four digits of the account number of an employee. This helps in verifying the issuance of the cheque.
3. Resignation Date: Employers need to include the resignation date/the last working day of an employee, as the letter is often used as a point of reference.
4. Statement of Account: Outline all the details related to payment settlement, and remember to be specific about settlement dates.
5. Laws: Include references to any laws if applicable.

Full and Final Settlement: Compliance Checklist

Here is a brief checklist to consider for a FNF settlement process.

1. Maintain wage registers to comply with the Payment of Wages Act.
2. Keep a record of leave balance in leave balance certificates, and follow the Shops and Establishment Act of the particular state or the Factories Act.
3. Include dates of issuing bonus payment for adhering to regulations under the Bonus Payments Act.
4. Maintain registers and documents to comply with laws such as the Digital Personal Data Protection Act (DPDP)
5. Provide details related to gratuity for adhering to the Payment of Gratuity Act if applicable.

Final Thoughts

A full and final settlement is an important process for any organization. In India, employers need to comply with laws such as the Payment of Wages Act and the Shops and Establishments Act when settling outstanding payments to employees. Write a detailed, full, and final settlement letter to avoid any future disputes. Also, include details like the cheque issuance date and a detailed statement of account for reference.

We provided a general full and final settlement letter format. Organizations can customize the letter according to their needs. Use our editable Word format for 2025 to write a concise but detailed FNF letter.

FAQs

What is the FNF Settlement?

The full name of FNF is Full and Final Settlement. An FNF settlement formally resolves any outstanding payments between the employer and employees. It describes how dues are computed and settled (salary, PTO payout, bonuses, reimbursements), specifies the check/transfer date, and includes additional information required by corporate policy and applicable labour laws.

How Long does Full & Final (FNF) Settlement Take?

The duration of a full and final settlement process varies based on company policy. However, it usually takes 30-45 days to complete a full and final settlement process in India.

What are the Rules for FNF Settlement in India?

There are five major rules related to the full and final settlement in India –

• The Payment of Wages Act: It ensures timely payment of salary.
• Payment of Gratuity Act: It provides for gratuity for employees who have worked for 5 years or more with an organization.
• Employee Provident Fund Act, and Employees State Insurance Act 1948: provide for withdrawal/transfer of ESI and EPF.
• Income Tax act 1961: exempts gratuity and leave encashment from tax deductions.
• The Factories Act and the Shops and Establishments acts: regulate leave encashment for factories and commercial establishments.

What is the Period of Settlement?

The period of settlement depends on the company’s policies, but generally, the payment is processed in 30-45 days. If it’s not processed within the days mentioned in the policy, the employee will have the right to take legal action against the employer.

What is a Full and Final Batch Settlement?

When an organization has too many employees, requests resignation or wants to lay off employees, they apply batch settlement and process the final settlement of multiple employees at a time.

What Will Happen to the Loan Balance of the Employees when You Settle Them?

There are two possible outcomes while settling an employee’s loan –

1. The organization will deduct the final amount from the employee’s final settlement, or

2. However, if the loan amount is higher than the settlement amount, then the organization will try to recover it from the employee in the form of a recovery payment.

What Happens when You Don’t Pay the Recovery Amount?

If you don’t pay the recovery amount, then the company can take legal steps against you and even withhold your documents, like NOC or experience letter, until they recover the money from you.

Is It Necessary to Serve a Notice Period for the Final Settlement?

Whenever an employee joins the organization, they sign a policy agreement mentioning that they will serve the notice period before leaving the organization. Therefore, it’s important for the employee to serve a period in order to proceed with the full and final settlement with the organization. In case any employee doesn’t want to serve the notice Period, then they can compensate the organization for leaving early.

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