FnF/ Employee Exits

What is FnF

FnF or Employee Exit Process is refers to clearing all the monetary and statutory dues of a
departing employee

Rules & Regulations

EnF process is governed under the various labour laws such as Wages Act, Gratuity Act, PF &
ESIC Act

When should an organisation pay FnF?

Rules on last day to pay FnF are not very clearly defined. In general, companies usually takes
around 30 to 45 days to process FnF.

However, the newly proposed code on wages mandates companies to settle final dues within
two days of an employee's last working day.

Process Checklist

Resignation Letter

Approval

Communicate to the key stakeholders

Handover of Roles & Responsibilities

Department Clearance

Access Revoke

FnF Calculations

Exit Interviews

Components of FnF

Salary Dues

It is the salary for the days worked between the resignation and the last date

Unpaid salary formula

(no. of days worked X gross monthly salary)/26 (or the no. of paid days in a
month)
Leave Encashment & Taxation

The amount that employee receives in lieu of the unutilised paid leaves. The
organisations have different policies for the leave encashment. Usually it could be
based on the number of days or a fixed amount.

Encashment of Non-availed leaves formula

(no. of days of non-availed leaves X monthly salary)/26 (or the no. of paid days in
a month)

Taxability of Leaves Encashment varies based on the nature of employment and the
time of payment of leave encashment.

Leave
Encashment

Other Government
Employees Employees

At the time of During the

Fully Exempt
Exit employment

Least of the
conditions u/s Fully Taxable
10(10AA)(ii)

Cash Eq. of the

Actual Leave Average 10
Rs 25,00,000 unavailaed
Encashment months salary
leaves

Example for Leave Encashment Taxability

Mr ABC, is retiring after 20 years of service. He was entitled to 25 days of paid leave
per annum from her company, meaning he had 500 days of leave during his entire
service to the company.

Out of this, Mr ABC has already utilised 150 days of paid leave. He is left with 350
days of unutilised leave.

He is drawing salary (Basic+DA) of Rs 35,000 per month at the time of retirement.

Now, leave encashment is calculated as:

Salary per day = 35,000/30 = Rs. 1167 (approx)

Leave encashment received = 350*1167 = 4,08,450

Taxability of Leave Encashment

Particulars Amount in Rs
Leave encashment received 4,08,450
Tax exemption: least of the following
1. Amount notified by the government (earlier 3,00,000) 25,00,000
2. Actual leave encashment 4,08,450
3. Average salary for 10 months (35000*10) 3,50, 000
4. Rs. 1167*(25 days*20 years-150 days of utilised leave) 4,08,450
Taxable Leave Encashment (4,08,450 - 3,50,000) 58,450

Bonus & Taxation

The amount of bonus to be given to the employees is purely based on the company’s
internal policies.

The bonus amount paid to the employee is considered as income under the head
salary and accordingly the tax is calculated based on your income slab.

Gratuity & Taxation

It is an amount paid by the employer to their employee as a symbol of gratitude for

their continuous services rendered.

Gratuity calculation formula

(15*last drawn salary (basic+DA)*number of years)/26

Taxability of Gratuity is based on the nature of employment

Gratuity

Government Other
Employees Employees

Actual
Amount
Fully Exempt Rs 20 Lakh Amount
Liable
Received
Example for Leave Encashment Taxability

Particulars Amount in Rs
Last Drawn Salary 35,000
A. Gratuity Amount (15*35,000*20)/26 4,03,846
B. Max. Exempt Gratuity 20,00,000
C. Gratuity Actually Received 5,00,000
Gratuity Amount Exempt 4,03,846
Gratuity Amount Taxable (5,00,000 - 4,03,846) 96,154

Retiral Benefits

Retiral benefits such as Employees’ Provident Fund or the contributions towards ESIC
needs to clearly mentioned to the employee along with their UAN and IP numbers.
The HR must also ensure to mark the exit dates on the respective portals of EPFO
and ESIC.

Deductions

There are various nature of deductions that an HR professional need to ensure that
they are deducted or not, such as:

Statutory Taxes on all above components

Unserved Notice Period

Outstanding Loan or Salary Advances

Damages to the equipment

Reimbursements

Any amounts that employee spent on behalf of company and has applied for
reimbursement for the same needs to be paid at the time of FnF settlement. It is
important to note that employee reimbursements are not considered as taxable
income while calculating Statutory taxes.

FnF Payslip and Settlement Letter

After calculating all the components of the FnF, the employer must issue a final
settlement payslip along with a letter stating that exiting employee has received all
dues from the company, and that he does not have any grievances against the
employer.

Form 16

The employer must issue Form 16 to the employee, which is a document containing
all the earning and taxes deducted, if any by the employer.