A full and final settlement letter is a written confirmation that a creditor has accepted a specified amount in complete satisfaction of all dues from a debtor for identified invoices or a period. Section 63 of the Indian Contract Act allows a creditor to accept a lesser sum in satisfaction. The letter should state the original dues, the amount received with payment details, and that no further claim remains.
The letter format
There are two versions. The first is issued by the creditor after payment. The second is a debtor's proposal, which you should only accept in writing if the amount suits you.
[CREDITOR LETTERHEAD] [CREDITOR NAME] | [ADDRESS] | GSTIN: [GSTIN] Date: [DATE] To, [DEBTOR LEGAL NAME] [ADDRESS] Subject: Full and final settlement of dues under invoices [INVOICE NOS. / PERIOD] Dear Sir/Madam, 1. As on [DATE], a sum of Rs [ORIGINAL DUES] was outstanding from you to us under the invoices listed below [and our legal notice dated [DATE] / case no. [CASE NO.]]. [INVOICE NO.] | [DATE] | Rs [AMOUNT] [INVOICE NO.] | [DATE] | Rs [AMOUNT] 2. By [settlement agreement dated [DATE] / mutual discussion on [DATE]], we agreed to accept Rs [SETTLEMENT AMOUNT] in full and final settlement of the above dues. 3. We confirm receipt of Rs [SETTLEMENT AMOUNT] as follows: [DATE] | [NEFT / RTGS / CHEQUE NO.] | [UTR / REFERENCE] | Rs [AMOUNT] [DATE] | [NEFT / RTGS / CHEQUE NO.] | [UTR / REFERENCE] | Rs [AMOUNT] 4. We accept this amount in full and final settlement of all our claims against you under the above invoices, including interest and costs. No further amount is due from you in respect of them. 5. [We shall issue a credit note for Rs [DIFFERENCE] towards the settlement discount / We shall withdraw case no. [CASE NO.] within [7] days.] 6. This letter does not cover [any other invoices / supplies after [DATE] / any amounts under [OTHER CONTRACT]], which remain unaffected. Yours faithfully, For [CREDITOR NAME] [SIGNATURE] [NAME], [DESIGNATION]
[DEBTOR LETTERHEAD] Date: [DATE] To, [CREDITOR NAME] [ADDRESS] Subject: Proposal for full and final settlement of dues Dear Sir/Madam, Your account shows Rs [ORIGINAL DUES] as payable by us under [INVOICES / PERIOD]. We propose to pay Rs [SETTLEMENT AMOUNT] by [DATE(S) AND MODE] in full and final settlement of all claims under these invoices. If acceptable, please sign below and return a copy. This proposal lapses if not accepted by [DATE] or if payment is not made by the dates above, in which case the original dues remain payable. For [DEBTOR LEGAL NAME] [SIGNATURE], [NAME], [DESIGNATION] ACCEPTED on the above terms: For [CREDITOR NAME] [SIGNATURE], [NAME], [DESIGNATION], Date: [DATE]
How to fill it
- List the invoices or the period covered, so it is clear what is being closed and what is not.
- Enter each payment with its UTR or cheque number, only after the funds have cleared.
- State the original dues and the settlement amount; the difference is the concession. Your accountant may treat it as a credit note or a write-off; see credit note.
- Add paragraph 6 if you continue to trade with the customer, so later invoices are not caught by the settlement.
Common mistakes
- Issuing the letter on a promise of payment. Issue it only after receipt; until then, use a settlement agreement with a default clause.
- Banking a cheque that the debtor marked "full and final" for an amount you never agreed. Courts look at the facts, but cashing it can be argued as acceptance; reply in writing first that you accept it only on account.
- Wording so wide ("all claims of any nature whatsoever") that it wipes out unrelated invoices or retention money.
- Forgetting to withdraw a pending case as promised, which can lead to a dispute over costs.
What happens next
Send the letter by email and keep a copy with the bank credit. Update your ledger, issue any credit note, and adjust GST where your accountant advises. If a case was pending, file the withdrawal or compounding application. If the customer asks for a no dues certificate instead, the same facts apply.
If you are still negotiating and the customer is offering a discount to pay, see buyer asking for discount to pay before you agree a figure.
Last reviewed: 2026-10-20. Information for Indian businesses; not legal advice.