Verify before relying on this. Some figures or dates here are pending confirmation against the official gazette or circular. Check the sources below, or ask us.
The rules that set the clock
| Item | Rule under the Codes |
|---|---|
| Wages due on exit | Paid within 2 working days of removal, dismissal, retrenchment or resignation (Code on Wages s.17(2)) |
| Gratuity eligibility | 5 years of continuous service (waived on death or disablement); 1 year for fixed-term employees, pro rata |
| Gratuity formula | 15/26 × last drawn Code wages × completed years. A part-year of more than 6 months counts as a full year |
| Gratuity ceiling and tax exemption | ₹20 lakh |
| Gratuity payment | Within 30 days of becoming payable. Interest runs after that. Employer's notice (Form V) within 15 days of the employee's application (Form IV) in the central sphere |
| Retrenchment | Compensation of 15 days' average pay per completed year, plus a Worker Re-skilling Fund deposit of 15 days' wages within 10 days |
| Deductions | Total deductions from wages are capped at 50% of wages (Code on Wages s.18) |
| Leave encashment tax exemption (non-government) | Up to ₹25 lakh over a lifetime, on retirement or resignation |
What "2 working days" covers. The two days run from the date of exit, meaning the last working day or relieving date, not the date the resignation letter was submitted. They apply to wages due, which in practice means the salary to the last day, the leave encashment that forms part of wages, and other amounts payable under the contract. Gratuity has its own 30-day rule. Long "45–60 day F&F cycles" are not compatible with s.17(2). Split the process into a statutory payment by day 2 and a documented reconciliation for the rest.
F&F checklist
Before the last working day
- To do: Confirm the exit type (resignation, termination, retrenchment, end of fixed term, death). Retrenchment triggers the IR Code steps.
- To do: Confirm the notice period served or waived, and any recovery or buy-out agreed in writing.
- To do: Get the leave balance, loan and advance balances, and asset returns signed off.
- To do: Get the employee's consent to any set-off of recoveries against final dues. Record it.
Compute
- To do: Salary to the last working day, on actual days.
- To do: Leave encashment per policy and the OSH Code, at the stated rate. Many policies use (Basic + DA) ÷ 26 or ÷ 30.
- To do: Gratuity on Code wages (with the 50% add-back), with service rounded.
- To do: Statutory bonus (pro rata, if eligible at ₹21,000 or less) and any variable pay due.
- To do: Notice pay shortfall recovery. Note that no GST applies to notice-pay recovery (CBIC Circular 178/10/2022).
- To do: PF and ESI for the final month's wages, PT for the month, and LWF where the register date falls in it.
- To do: TDS under s.392, on projected income for the year from this employer.
Pay and report
- To do: Pay wages within 2 working days, and gratuity within 30 days.
- To do: ECR (Form VII): record the exit date and reason. ESI: exit code in the next contribution.
- To do: Issue the Form 130 annual certificate by 15 June, and a salary statement to the employee now.
- To do: Issue the relieving and service certificate. In Karnataka, a service certificate is due within 7 days of request. Return any original documents.
Worked example: resignation, Bengaluru
The facts.
- Joined 1 Jul 2020. Last working day Friday 30 Oct 2026. The notice period is 60 days and 30 were served. The company works a five-day week.
- Monthly pay: Basic ₹35,000, HRA ₹20,000, Conveyance ₹15,000, LTA ₹5,000. Total ₹75,000.
- Earned-leave balance: 24 days. Policy rate: Basic ÷ 30.
- New tax regime, no other income.
Step 1: Code wages. Excluded items (HRA, conveyance, LTA) total ₹40,000. Half of ₹75,000 is ₹37,500, so ₹2,500 is added back. Code wages = 35,000 + 2,500 = ₹37,500.
Step 2: Service. 1 Jul 2020 to 30 Oct 2026 is 6 years, 3 months and 30 days. The part-year is under 6 months, so service counts as 6 years.
Step 3: Components.
| Component | Computation | ₹ |
|---|---|---|
| Salary, 1–30 October | 75,000 × 30/31 | 72,581 |
| Leave encashment | 35,000 ÷ 30 × 24 | 28,000 |
| Gratuity | 15/26 × 37,500 × 6 | 1,29,808 |
| Gross dues | 2,30,389 | |
| Less: notice shortfall recovery (30 days' basic, per contract) | (35,000) | |
| Less: PF employee share | 12% × (25,000 × 30/31) | (2,903) |
| Less: Karnataka PT (October) | (200) | |
| Less: TDS | see below | 0 |
| Net payable | 1,92,286 |
If gratuity had been computed on basic alone, it would have been ₹1,21,154, which is ₹8,654 short.
Step 4: Tax.
- Gratuity: exempt. It is the least of actual, the formula amount and ₹20 lakh.
- Leave encashment: exempt. It is the least of ₹25 lakh, actual, 10 months' average salary and the cash value of leave at up to 30 days per year of service.
- Salary: April–October salary is 6 × 75,000 + 72,581 = ₹5,22,581. Less the ₹75,000 standard deduction, taxable income is ₹4,47,581. Tax at 5% on ₹47,581 is ₹2,379, and the s.156 rebate removes it. TDS is nil. The employee declares this income to the next employer.
Step 5: Deadlines.
- Wages (salary and leave encashment, less agreed recoveries): by Tuesday 3 Nov 2026, which is 2 working days after 30 October.
- Gratuity: by 29 Nov 2026, within 30 days.
Step 6: The 50% deduction cap. Recoveries from the October wage payment total ₹38,103. That is 52% of the ₹72,581 salary, which is above the 50% cap in s.18. There are three safe options:
- Treat leave encashment as part of the wages against which the recovery is made (it is paid as wages on exit).
- Set the recovery off against total dues with the employee's written consent.
- Recover the excess separately.
Do not quietly net it against gratuity. Gratuity is protected from attachment, and the Code allows only limited forfeiture, for example for proven damage or misconduct.
Fixed-term variant
A fixed-term employee whose 1-year-8-month contract ends, with Code wages of ₹30,000, receives gratuity of 15/26 × 30,000 × 2 = ₹34,615, applying the usual more-than-6-months rounding. It must be paid within 30 days of the contract end. Under the pre-Code law there was nothing to pay before 5 years.
Common errors we see
- Waiting for the "next payroll cycle" to pay exit wages.
- Computing gratuity on basic alone when allowances exceed 50% of pay.
- Missing the 1-year fixed-term gratuity.
- Recovering notice pay with GST, or beyond the 50% cap without consent.
- Withholding original documents or delaying the service certificate.
- Filing the exit month's ECR without the exit date, which blocks the employee's PF transfer.
Effective dates at a glance
| Date | Rule |
|---|---|
| 1 Apr 2023 | Leave-encashment exemption for non-government employees raised to ₹25 lakh |
| 21 Nov 2025 | 2-working-day F&F wages rule; fixed-term gratuity after 1 year; Code wages definition |
| 1 Apr 2026 | TDS under s.392 of the Income-tax Act 2025; Form 130 |
| 8 May 2026 | SS (Central) Rules 2026: gratuity Forms III–IX |
| 4 Sep 2026 | Karnataka: service certificate within 7 days; no retention of originals |
Status note (verify: true). Our rates file rates the gratuity rules as medium confidence, pending full state rules. Whether s.17(2) runs from the last working day and covers leave encashment is an interpretation, although a widely held one. The 50%-cap analysis should be checked against the state rules that apply to your establishment.
General information, not legal advice. Last reviewed 27 Sep 2026.