When you resign from a job in India, your employer owes you a full and final settlement. A lump sum covering gratuity, unused leave, and any notice period shortfall. But the math is rarely straightforward, and employers often get individual components wrong.
What makes up your final settlement?
Three main parts: gratuity (if you've worked 5+ years), leave encashment (payment for unused paid leave), and notice period shortfall (if you didn't give the required notice).
Gratuity: Only after 5 years
You must have worked 5 full years continuously to qualify for gratuity. If you've worked 4 years and 11 months, you get zero.
The formula is simple: (Basic + DA) × 15 ÷ 26 × Years of Service
The 15 ÷ 26 is the statutory daily rate (15 working days per 26 working days in a month). If you've worked 6 years and 6 months, round the final 6 months up to a full year - so count it as 7 years.
Here's the catch: gratuity is capped at Rs. 20 lakh for private sector and Rs. 25 lakh for government. Anything above that cap is taxable. This cap is also the Section 10(10) tax exemption limit, so you'll never pay tax on gratuity if the employer paid it correctly.
Example: 6 years of service, Basic Rs. 50,000, DA Rs. 5,000.
Gratuity = (Rs. 50,000 + Rs. 5,000) × 15 ÷ 26 × 6 = Rs. 75,000. Tax-free.
Leave encashment: Only earned/privilege leave
Not all leave is encashable. Typically Earned Leave (EL) and Privilege Leave (PL) are; casual and sick leave usually aren't (varies by state and company policy).
The formula: (Basic + DA) ÷ 30 × Number of Unused Leave Days
Leave encashment falls under Section 10(10AA), which exempts up to Rs. 25 lakh per employee per lifetime - shared across all employers. Anything above Rs. 25 lakh is taxable.
Example: 45 unused leave days, Basic Rs. 50,000, DA Rs. 5,000.
Leave Encashment = (Rs. 55,000 ÷ 30) × 45 = Rs. 82,500. Tax-free (under Rs. 25L).
Notice period shortfall: Salary deduction
If your contract requires 60 days' notice but you only worked 40 days after resigning, the employer deducts the 20-day shortfall from your settlement.
The formula: (Basic + DA OR Gross) ÷ 30 × Short Days
Here's where people get confused: your appointment letter specifies whether the shortfall is calculated on Basic+DA or Gross. These can differ by thousands of rupees. Check your letter before resigning - asking HR in writing beats finding surprises on your settlement.
Example: 60-day notice required, you worked 25 days, Gross Rs. 65,000.
Shortfall = (Rs. 65,000 ÷ 30) × 35 = Rs. 75,833. This gets deducted.
A complete settlement example
Tenure 6 years 8 months, Basic Rs. 50,000, DA Rs. 5,000, Gross Rs. 65,000, 30 unused leave, 60-day notice required but only 25 days worked, Rs. 5,000 bonus pending, Rs. 2,000 uniform cost to deduct.
Gratuity = Rs. 77,596 (6+ months in final year rounds up)
Leave Encashment = Rs. 55,000
Notice Shortfall = -Rs. 75,833 (deducted)
Bonus = +Rs. 5,000
Uniform Cost = -Rs. 2,000
Total = Rs. 59,763 (before tax on the notice shortfall)
Before you sign your settlement
Ask for an itemized breakdown. Verify the dates, rounding, and statutory caps yourself. Cross-check leave days against your records. If the notice-period calculation uses a different base than your appointment letter says, ask HR in writing.
Rather than doing this by hand - which is error-prone - use our Final Settlement Calculator to check your numbers against your employer's offer. Upload your salary details, confirm your dates, and get an instant breakdown. Then compare it against what HR gave you.
Consult a CA for your specific tax situation - gratuity and leave-encashment rules vary by state, sector, and contract. An error here can cost you significant money.