Most Indian employers still run full and final settlement on a 30 to 45 day cycle. Since the labour codes came into force, that is no longer compliant for the wages component.
Under Section 17(2) of the Code on Wages, 2019 — in force from 21 November 2025 — wages payable to an employee who resigns, or who is removed, dismissed or retrenched, must be paid within two working days of that event. Gratuity, provident fund and reimbursements run on their own separate timelines and are not covered by the two-day rule.
Running exits on a 30-day cycle still? WhatsApp us your current process and we will tell you what has to change.
Quick Summary
| Component | Timeline | Governing provision |
| Wages, including unpaid salary and leave encashment forming part of wages | Two working days from exit | Code on Wages, 2019, s.17(2) |
| Gratuity | Within 30 days of becoming payable | Code on Social Security, 2020 |
| Provident fund — transfer or withdrawal | EPFO processing timeline, after a valid claim | EPFO claim process |
| Expense reimbursements | Per company policy; not statutory wages | Internal policy |
| Variable pay, bonus, incentives | Per the terms under which they were earned | Contract and policy |
| Notice pay recovery or shortfall | Adjusted against wages, within permitted deduction limits | Code on Wages, 2019, s.18 |
💡 TaxKitab Tip Separate the exit payout into two runs, not one. Run A is wages — salary to date of exit, leave encashment and any arrears — processed within two working days. Run B is everything else: gratuity, reimbursements, variable pay, each on its own timeline. Employers who insist on a single consolidated F&F cheque end up breaching the two-day rule while waiting for a gratuity calculation or a laptop to come back. The two-run split is the simplest way we have found to make the deadline achievable in practice.
What the Two-Day Rule Actually Says
Section 17(2) of the Code on Wages, 2019 applies where an employee has been removed or dismissed from service, retrenched, or has resigned, or has become unemployed due to closure of the establishment. In those cases wages payable are to be paid within two working days.
Two points employers get wrong.
It covers resignation, not only termination. The earlier assumption — that fast settlement applied to dismissals and retrenchment while a resigning employee could wait — does not survive the text. An employee who works out their notice is covered from their last day.
“Wages” is defined, and the definition matters. Under the Code, wages means basic pay, dearness allowance and retaining allowance, with specified exclusions. House rent allowance, conveyance, overtime, commission, statutory bonus, gratuity, provident fund contributions and most reimbursements sit outside the definition — subject to the proviso that where excluded components exceed half of total remuneration, the excess is added back into wages.
That proviso is why the calculation is not as simple as it looks. An employee on an allowance-heavy structure may have a larger wages figure for this purpose than the salary slip suggests.
What Goes Into the Settlement
Salary to date of exit, pro-rated on actual days, including any arrears from a revision that had not yet been paid.
Leave encashment on accumulated earned or privilege leave, per policy and the leave rules applicable to the establishment. Casual and sick leave are usually not encashable — check the governing standing orders or policy.
Statutory bonus, where the employee is eligible and the entitlement for the period has accrued.
Gratuity, where the service condition is met — five years of continuous service for regular employees; fixed-term employees qualify pro-rata without that condition under the Code on Social Security, 2020. Gratuity sits outside the two-day deadline, on its own 30-day timeline.
Reimbursements for approved expenses already incurred.
Variable pay and incentives on whatever basis the scheme provides. If the scheme requires the employee to be on rolls at payout date, say so in the scheme document — arguing it at exit is a losing position.
What Comes Out
Notice period shortfall, where the employee has not served the agreed notice and the contract provides for recovery.
Advances and loans outstanding.
Unreturned assets, where there is a documented policy and a valuation basis. An arbitrary amount for a laptop with no policy behind it is the kind of deduction that gets challenged.
Deductions from wages are capped under the Code on Wages — total deductions cannot exceed 50% of wages in a wage period. Where recovery exceeds that, it has to be spread or pursued separately rather than netted off. Check this before the payout is approved, because exceeding the cap converts a recovery into a wage default.
The TDS Position
TDS on the settlement is salary TDS, deducted at the time of payment. Under the Income-tax Act, 2025 — applicable from 1 April 2026 — salary TDS sits in Section 392, the successor to Section 192 of the 1961 Act, and the renumbering is part of the wider set of changes covered in what changed in the Income Tax Act 2025.
Three components need attention.
Gratuity is exempt up to the statutory ceiling, currently ₹20 lakh, for covered employees.
Leave encashment on retirement or resignation is exempt for non-government employees up to ₹25 lakh, computed on the prescribed formula.
Notice pay recovered reduces the salary actually paid. The treatment has been litigated; the safer position is to deduct TDS on the net amount paid and keep the computation on file.
Form 16 for the year must reflect the full settlement — an exit is not a reason to skip it. Where TDS was deducted, the quarterly statement has to carry it; the salary TDS statement is now numbered Form 138 under the 2025 Act framework, replacing Form 24Q.
Where This Sits in the Wider Change
The two-day rule is one of several employer obligations that shifted when the codes came into force, and the rest are set out in what the new labour codes change for employers. Because the settlement carries salary TDS, the deduction and quarterly return side moves with it. And for employers building the process in-house rather than outsourcing it, the exit run is one of the modules in our payroll training.
Frequently Asked Questions
Is the two-day deadline two calendar days or two working days? Two working days. Weekly offs and holidays are excluded, which in practice gives a resignation on a Friday until Tuesday.
Does the two-day rule cover gratuity? No. It applies to wages as defined in the Code. Gratuity is specifically excluded from the wages definition and runs on its own 30-day timeline under the Code on Social Security, 2020.
What if assets have not been returned by day two? Pay the wages on time and pursue the asset recovery separately, within the deduction limits and with the policy basis documented. Withholding wages beyond the deadline to force an asset return is a wage default, not leverage.
Can an employee waive the two-day timeline in writing? A statutory timeline is not generally waivable by agreement. Treat a written request to delay as evidence of goodwill, not as a defence.
Does this apply to establishments of every size? The Code on Wages applies broadly to employees in all establishments, without the threshold exclusions that applied under some of the repealed Acts. Confirm applicability for your establishment type and state, since state rules under the codes are being notified separately.
What about the employee’s PF? The employer pays nothing at exit beyond contributions already due. The employee transfers the balance to a new UAN-linked account or claims withdrawal, on EPFO’s own timeline. The employer’s obligation is to mark the date of exit in the EPFO portal promptly — that is what unblocks the claim.
References
- Code on Wages, 2019 (Act No. 29 of 2019), Section 17(2) — wages on removal, dismissal, retrenchment or resignation within two working days; official text as on 21 November 2025, India Code portal
- Code on Wages, 2019, Section 18 — permissible deductions and the 50% ceiling
- Code on Social Security, 2020 — gratuity entitlement, including pro-rata gratuity for fixed-term employees
- Income-tax Act, 2025, Section 392 — deduction of tax on salary, effective 1 April 2026
⚠️ The labour codes came into force on 21 November 2025 and state-level rules under them are still being notified. Confirm the position for your state and establishment type before changing process.
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See our Payroll & HR Compliance service if you would rather the exit cycle was run for you, or the TaxKitab Academy payroll course if your own team should own it. Get in touch.
