Finance Formula • Published on September 04, 2026 • Last updated September 04, 2026
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Base salary component specified in employee appointment contract
Cost of living allowance where applicable in employment terms
Number of notice period days not served by employee prior to last working day
Prorated compensation for days worked in final departure month
Cash value of accumulated earned/privilege leaves: $(\text{Basic} / 30) \times \text{Leave Days}$
Statutory gratuity under 1972 Act if tenure exceeds 4 years 240 days: $\frac{15 \times \text{Last Basic} \times \text{Tenure Years}}{26}$
Mandatory deductions including employee Provident Fund (12%), Professional Tax, and Income Tax (TDS)
When an employee resigns from an organization in India, the employer computes the Full and Final (FnF) settlement.
If the departing employee cannot serve the mandatory contractual notice period (typically 30, 60, or 90 days), the employer calculates a Notice Period Buyout / Recovery amount based on unserved days.
Indian labor court precedents establish that notice buyout recovery must strictly be calculated on Basic Salary plus DA, rather than Total CTC (Gross), unless an explicit valid clause stipulates otherwise.
Under standard Indian employment contracts and legal precedent, notice recovery is calculated solely on Basic Salary (plus DA where applicable), divided by 30 days. However, if an employment agreement specifically defines notice pay on Gross or CTC, employers may attempt that deduction.
No. CBIC Circular No. 178/10/2022-GST explicitly clarified that notice pay recovery by an employer from an employee for not serving the notice period is an agreement to tolerate an act, but does not constitute a taxable supply under GST. Hence, 18% GST cannot be charged on notice recovery.
In standard corporate governance and state labor department guidelines across India, employers are expected to disburse the FnF settlement and issue the relieving/experience letter within 30 to 45 days from the employee's last working day.
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