Final Settlement and Tax on Full and Final Payments

When an employee leaves, the full and final settlement must account for tax on the salary and benefits paid up to the exit date. Because the employee will only have worked part of the tax year, the annual projection used during the year no longer holds, and the tax must be recomputed on the actual taxable income earned through the separation date.

Getting the Exit Calculation Right

The settlement typically includes salary for the final period, payment for accrued leave where applicable, and any terminal benefits such as gratuity, each of which has its own treatment. The correct approach is to total the actual taxable income for the partial year, compute the tax due using the FBR slabs, compare it with the tax already deducted, and settle the difference in the final payment so the employee neither over-pays nor leaves with a shortfall.

Key Steps at Separation

• Total actual taxable income earned through the exit date
• Apply the correct treatment to leave encashment and terminal benefits
• Recompute tax due against tax already deducted
• Settle the difference within the final payment
• Issue a clear statement of income and tax for the period worked

Zaffre HRM, the payroll module within Zaffre Axon by Zaffre Tech, recomputes the partial-year tax automatically at separation, reconciles it against deductions already made, and produces a clean settlement statement. This removes the manual back-calculation that often delays exit payments.

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