What the last payslip is made of
A full-and-final settlement is not one payment. It is an arithmetic exercise with things added and things taken away, and the reason it looks nothing like a normal payslip is that most of the lines on it appear exactly once in your time at a company.
The confusing part is that the pieces are computed on different bases. Leave encashment usually runs on basic pay plus dearness allowance. Notice recovery often runs on a larger figure. Gratuity runs on a formula written into a statute. Two of those three are decided by your employment contract; one is not, and knowing which is which is most of the battle.
| Added | Taken away |
|---|---|
| Salary for days worked in the final month | Notice period not served |
| Encashable leave balance | Salary advances and company loans |
| Gratuity, where five years are complete | Assets not returned |
| Reimbursements already approved | Tax on the settlement |
Leave encashment, and how it is worked out
Companies usually run three kinds of leave, and only one of them turns into money. Casual leave and sick leave typically lapse at the end of the year. Earned or privilege leave is the kind that either carries forward or is paid out, up to whatever ceiling the company's rules set.
The common formula is (basic pay plus dearness allowance) divided by the number of days in a month, multiplied by the number of encashable leave days. Which divisor a company uses — 26, 30, or the actual days in the month — changes the answer by more than people expect, and it is a company decision rather than a statutory one. The number is in your terms of employment.
The tax treatment splits on when you receive it. Leave encashed while you are still working there is fully taxable as salary. Leave encashed on leaving is exempt up to a ceiling notified by the government — a lifetime ceiling, counted across every employer you have had, not a fresh one for each job. The ceiling and the exact computation are published on the income tax portal, and the treatment for a government employee is different again.
Notice-period recovery
A notice period is a contractual term: an agreed number of days between resigning and your last working day, so that work can be handed over rather than abandoned. Leaving before serving it usually means the company recovers the unserved portion in salary terms.
How much is recovered, and on what base — basic pay only, or gross, or the full cost to company — is written in your appointment letter. There is no single statutory figure. It varies by employer, by seniority and sometimes by function, so anyone quoting you a standard number is quoting their own employer's contract at you.
Two consequences follow. A buy-out paid by a new employer is a payment from them to you and is taxable as salary in your hands; it is not a netting-off between two companies. And where your old employer recovers an amount from the settlement, how that recovery is reflected in your Form 16 has been argued more than one way, so the figure there may not match the arithmetic you did at home.
Gratuity, where the five-year test is met
Gratuity is the one part of the settlement that is statutory rather than contractual. Under the Payment of Gratuity Act 1972 it becomes payable on the ending of employment after not less than five years of continuous service, and the five-year test is waived where employment ends because of death or disablement.
The formula is fifteen days' wages for every completed year of service, where a month is reckoned as 26 working days. In practice that is last drawn monthly wages divided by 26, multiplied by 15, multiplied by the number of completed years — which works out to roughly 58% of a month's wages for each year served.
Gratuity is exempt from income tax up to a lifetime ceiling of ₹20,00,000 under section 10(10). That ceiling counts across every employer, not per job, so a second gratuity later in a career eats into the same headroom. Anything above it is taxable as salary.
The trap is the word "completed". Five years means five completed years of continuous service with one employer, so leaving at four years and nine months usually means no gratuity at all. And gratuity is entirely separate from your provident fund balance, which follows you from employer to employer regardless of how long you stayed.
Why it takes weeks
The settlement cannot be computed until every input to it is final. That means the last day's attendance recorded, the leave register closed, company assets returned and signed off by whoever owns them, outstanding reimbursements resolved, and the tax for a part-year recomputed. Each of those sits with a different team, and the settlement waits for the slowest one.
Most employers state a target — commonly some number of weeks from the last working day — in the appointment letter or the exit paperwork. That target is contractual, which makes it the specific thing to point at if the settlement goes quiet.
The most useful thing to do is front-loaded and takes ten minutes. Before your last day, get the leave balance and the recovery figure confirmed in writing. While you are still an employee you are asking a colleague a question. Afterwards you are a former employee asking a stranger for a favour, and the difference in response time is considerable.