F&F payout tax rules: Switched jobs, received full and final settlement? Know which components are taxable
When a salaried employee resigns, retires, or is terminated, their employer calculates and clears all remaining financial dues after the person's last working day. This process is known as full and final settlement or F&F.
The payout typically includes unpaid salary up to the last working day, leave encashment, gratuity (if eligible), bonuses, and provident fund (PF) adjustments, after accounting for deductions like notice period recovery or loans.
However, you do not receive the full amount in your bank account. This is because employers generally deduct TDS (tax deducted at source) under Section 192 on taxable salary components before crediting the net settlement amount.
A full and final settlement in India is not taxed as a single lump sum. Instead, each component of the payout is taxed separately (wherein applicable), according to Suraj Singh, Founder of SD Singh & Associates, Chartered Accountants.
“Pending salary up to the last working day, unpaid salary, salary arrears, notice period pay, bonuses, incentives, commissions and leave encashment during employment are fully taxable and has no separate implications,” he said.
However, certain components qualify for tax exemption, subject to prescribed conditions and limits under the Income-tax Act.
According to Singh, gratuity of up to ₹20 lakh received by eligible non-government employees qualifies for tax exemption.
Similarly, leave encashment received on retirement is exempt up to ₹25 lakh for non-government employees. Government employees, however, enjoy complete tax exemption on leave encashment.
Voluntary retirement compensation of up to ₹5 lakh is also exempt from tax.
However, all three exemptions are subject to specified limits, and the actual tax-free amount depends on various factors, such as the employee's last drawn salary and length of service, Singh added.
PF withdrawals may also be tax-exempt if they are made after completing five years of continuous service. If an employee withdraws the accumulated PF balance before completing five years of service, the amount may become taxable, unless the exit falls under specified exceptions, such as termination due to ill health or discontinuation of the employer's business.
When an employee resigns, most components of the F&F settlement are taxable as salary income. Pending salary up to the last working day, unpaid bonuses and incentives are fully taxable, like we discussed above.
Additionally, notice period pay is also also taxable, as it is treated as salary, said Siddharth Maurya, Founder & Managing Director, Vibhavangal Anukulakara. For instance, if you worked just 12 days in a month before being relieved and got salary for those days, the amount will be subject to tax.
Retrenchment compensation, on the other hand, is tax-exempt, provided it is under ₹1 lakh per month, Maurya added. The compensation is calculated under the applicable industrial-relations law.
He further explained that retirement can provide additional tax benefits. While salary and bonuses remain taxable, individuals earning up to ₹12 lakh may have no tax liability under the new tax regime.
Eshita Gain is a digital journalist at Mint, where she joined in May 2025. She writes on corporate developments, personal finance, markets, and business trends, with a focus on delivering timely and relevant stories to a broad audience. <br><br> While her core beat lies in business and finance, she is not confined to a single niche and frequently explores stories across domains, including international relations and policy developments. <br><br> She holds a postgraduate diploma in business and financial journalism by Bloomberg from the Asian College of Journalism (ACJ), Chennai. During her time there, she received rigorous training in tracking financial data, interpreting corporate filings, and reporting on business developments. She has pursued her graduation from St. Joseph’s University, Bengaluru in a multi-disciplinary course. Her majors included Journalism, International Relations, peace and conflict studies. <br><br> Eshita has previously worked in digital marketing, which enables her to write SEO friendly copies that are clear and engaging. <br><br> Her primary interest lies in breaking down complex subjects and writing clear, accessible copies that inform readers. She aims to bridge the gap between technical financial language and everyday understanding. Outside the newsroom, Eshita enjoys reading non-fiction, and exploring new places, constantly seeking fresh perspectives and stories beyond headlines.
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