How to Calculate Final Settlement and Gratuity

Why final settlements go wrong

When someone leaves, payroll has to pay several things at once: salary up to the last day, notice pay or a deduction for notice not served, unused leave, end-of-service gratuity where it applies, and any loan still owed. In many small businesses this is worked out on a spreadsheet days after the person has gone.

Mistakes are common and visible. The leaver is also paid in the regular run, so they are paid twice. A loan balance is forgotten. Gratuity is calculated on the wrong salary base, or the business discovers it never set money aside for it and the payout hits one month's results.

A settlement should be calculated from the same records payroll already holds, previewed before anything is paid, paid through a normal run with its approvals and postings, and kept out of the regular run so nobody is paid twice.

Why this happens

• Settlements are worked out on a spreadsheet.
• The leaver is also paid in the regular run.
• Loan balances are forgotten at exit.
• Gratuity rules are not written down.
• No provision is built up for gratuity.

Biznsbook addresses this through final settlement preview, gratuity (end-of-service) policy, one-person settlement run, gratuity provision every regular run in Payroll, calculated from the same salary, leave and loan records as the regular run.

Small gaps in payroll rarely fail loudly. They show up later as numbers nobody can explain. Recording each step where it happens removes the guesswork.

Step-by-step: Calculate Final Settlement and Gratuity

Written for payroll and HR teams in small and mid-sized businesses using Biznsbook Payroll with HR Management.

1. Set the gratuity policy. In Payroll settings → Gratuity / end of service, set days of pay per year of service (first tier and after), minimum service, an optional cap, what a day's pay is based on, and the share paid on resignation by years of service.
2. Build the provision. With Provide for it every regular run on, each regular run tops up the gratuity provision in the books. Provision held before go-live goes under Opening balances.
3. Prepare the settlement. Open Final settlements → Prepare a settlement, or the button on a resignation in HR. Choose the employee, last working day and reason, notice days (negative if notice was not served) and leave days to encash.
4. Check the preview. Work it out shows the day rate, notice, leave, gratuity and loans to recover before anything is created.
5. Create the settlement run. Create settlement run makes a one-person run in the pay period of the last working day. The period's regular run then leaves that employee out.
6. Calculate, approve, post and pay. Run it like any payroll run. With the provision on, the settlement pays gratuity out of the provision.
7. Correct if needed. A posted run can be reversed with a reason: the payment and accrual are reversed and loan balances restored, and you can run it again.

Review results after the first full quarterly cycle. Adjust roles, mappings, or approvals where the same exception repeats.

Screen-level flows live in the Help Center. This guide focuses on the business process; help articles cover click-by-click navigation.

Common mistakes to avoid

• Mistake 1: Settlements are worked out on a spreadsheet. Repeating this each month usually shows up first in leavers paid twice or underpaid.
• Mistake 2: The leaver is also paid in the regular run. Repeating this each month usually shows up first in leavers paid twice or underpaid.
• Mistake 3: Loan balances are forgotten at exit. Repeating this each month usually shows up first in leavers paid twice or underpaid.
• Mistake 4: Gratuity rules are not written down. Repeating this each month usually shows up first in leavers paid twice or underpaid.
• Mistake 5: No provision is built up for gratuity. Repeating this each month usually shows up first in leavers paid twice or underpaid.

Each of these turns into a question payroll cannot answer quickly. Fix the process on the record rather than in email threads or spreadsheets.

Best practices that hold up as you scale

• Set the gratuity policy — In Payroll settings → Gratuity / end of service, set days of pay per year of service (first tier and after), minimum service, an optional cap, what a day's pay is based on, and the share paid on resignation by years of service.
• Build the provision — With Provide for it every regular run on, each regular run tops up the gratuity provision in the books.
• Prepare the settlement — Open Final settlements → Prepare a settlement, or the button on a resignation in HR.
• Check the preview — Work it out shows the day rate, notice, leave, gratuity and loans to recover before anything is created.
• Create the settlement run — Create settlement run makes a one-person run in the pay period of the last working day.

Set the gratuity policy and provision before the first leaver, not on the day they resign.

How Biznsbook supports this workflow

final settlement preview is part of Biznsbook and works on the same records as the rest of payroll, so the decision, the stock and the books stay in step and every action is recorded with who did it and when.

gratuity (end-of-service) policy is part of Biznsbook and works on the same records as the rest of payroll, so the decision, the stock and the books stay in step and every action is recorded with who did it and when.

one-person settlement run is part of Biznsbook and works on the same records as the rest of payroll, so the decision, the stock and the books stay in step and every action is recorded with who did it and when.

gratuity provision every regular run is part of Biznsbook and works on the same records as the rest of payroll, so the decision, the stock and the books stay in step and every action is recorded with who did it and when.

Settings, country packs, gratuity policy and opening balances need Manage payroll settings; reversing a posted run needs the post-to-accounting permission.

Suggested implementation timeline

1. Week 1: Set up final settlement preview and the permissions the people involved need.
2. Week 2: Run the real process in Biznsbook only, with no side spreadsheet, for one team or site.
3. Week 3: Review what was recorded with the people involved and tighten the rules where they disagreed.
4. Month 2: Roll out to every team or site.
5. Ongoing: Reviewing leavers and provisions each quarter.

Related guides

Cluster hub: HR & payroll guides. Module: payroll software. Also see leave encashment.

Holding, reversing and opening balances

A settlement run is a normal payroll run, so the same controls apply. If one person's pay must wait, for example while equipment is returned, click Hold beside the employee and give a reason: the pay is calculated and accrued but kept out of the bank file and the salary payment. Remove the hold before the run is paid, or use Release & pay afterwards to pay that employee on their own.

If a posted run turns out to be wrong, Reverse it with a reason. The payment and the accrual are reversed in the ledger, loan balances and expense claims are restored, payslips are withdrawn and the run becomes Reversed, after which a new run can be created for the period.

Businesses that go live mid-year enter year-to-date figures and any gratuity already provided under Opening balances, so the first settlement pays out of the right provision rather than charging the whole amount to one month.

Gratuity rules differ by country and contract. Biznsbook applies the policy you set; it does not include certified country filing packs or e-filing, so confirm the tiers, minimum service and resignation shares with your payroll advisor before the first leaver.

Metrics to track monthly

• Settlements paid this quarter
• Gratuity provision against the policy
• Leavers appearing in a later regular run
• Loans recovered at exit

Start with three metrics; trend direction matters more than a single point-in-time snapshot.

Manual workarounds vs Biznsbook

Compare common manual workarounds with Biznsbook final settlement preview and the related capabilities.

Reviewing leavers and provisions each quarter

Each quarter, compare the gratuity provision with what the policy would pay if everyone left, review settlements paid in the quarter against their resignation records, and check that no leaver appears in a later regular run. Recheck the policy with your payroll advisor when rules change.

Write the settlement checklist into your exit process and confirm the gratuity policy with your payroll advisor.

Frequently asked questions

How this differs by industry