India’s top three IT services companies—Tata Consultancy Services (TCS), Infosys, and HCLTech—have taken a combined financial hit of over ₹4,373 crore in exceptional charges following the implementation of the country’s new labour codes. The impact was felt most sharply in the December quarter (Q3), contributing to a steep double-digit decline in net profits across all three firms and reigniting concerns around margin sustainability in an already challenging business environment.
While the companies insist the worst is behind them, brokerages remain cautious, warning that the labour reforms could structurally raise employee costs and exert long-term pressure on margins.
Credits: Business Today
Breaking Down the One-Time Charges
The financial impact was disclosed during Q3 earnings announcements in January. Infosys reported an exceptional charge of ₹1,289 crore, while TCS accounted for ₹2,128 crore. HCLTech booked an exceptional charge of ₹956 crore, translating to approximately $109 million.
These charges stem from statutory adjustments required under the new labour codes, particularly the increase in gratuity liability due to past service costs and a reassessment of leave encashment obligations. For TCS alone, around ₹1,800 crore was allocated to gratuity, with another ₹300 crore used to align leave liabilities.
Though classified as exceptional, these costs reflect deeper structural changes in how employee compensation and social security benefits are calculated.
Margin Impact: A Mixed Picture
Despite the significant cost headwinds, TCS managed to hold its operating margin flat at 25.2% sequentially, showcasing strong cost controls and operational resilience. HCLTech went a step further, improving its operating margin to 18.6% during the quarter.
Infosys, however, was more visibly impacted. Its operating margin fell sharply to 18.4%, down from 21% in the previous quarter. The company clarified that without the labour code-related costs, its adjusted margin would have stood at around 21.2%, highlighting the material impact of the new regulations.
Still, all three companies have emphasized that the bulk of the financial adjustment has already been absorbed.
What the New Labour Codes Mean for IT Firms
Implemented in November 2025, the new labour codes aim to improve wages, workplace safety, social security coverage, and employee welfare. For the IT and IT-enabled services sector, the changes are particularly significant.
The codes mandate higher basic pay, ensure guaranteed social security benefits, require formal appointment letters, define work hours, and promote fixed-term employment. Importantly, companies must now facilitate night shifts for women across establishments, potentially enabling higher earnings and broader workforce participation.
A key provision requires that employee wages form at least 50% of total cost-to-company (CTC), with benefits such as provident fund and gratuity calculated on this higher base—effectively increasing recurring employee costs.
What Company Executives Are Saying
Company leadership has played down fears of prolonged margin damage. TCS CFO Samir Seksaria said the ongoing impact would be limited to around 10–15 basis points, barring further regulatory clarifications.
Infosys CFO Jayesh Sanghrajka echoed this view, estimating an annual impact of roughly 15 basis points going forward. HCLTech CEO C Vijayakumar described the ongoing cost increase as “very minimal,” pegging it between 10 and 20 basis points.
The consensus among management teams is clear: the heavy lifting is done, and future impacts will be manageable.
Brokerages Remain Cautious on the Road Ahead
Brokerages, however, are less optimistic. Jefferies has cautioned that the labour codes are unlikely to remain a one-time issue. According to the brokerage, higher wage-linked social security contributions could coincide with slower revenue growth, AI-driven changes in business mix, and potentially higher onsite wage costs due to evolving H-1B visa norms in FY27 and FY28.
Jefferies estimates that a 2% rise in Indian employee costs could reduce FY27 earnings by 2–4% for IT companies. To offset this, firms may moderate future wage hikes—particularly at senior levels.
Credits: News18
A Structural Shift, Not Just an Accounting Event
While the immediate financial shock has been absorbed, the new labour codes mark a structural shift in India’s IT employment model. The coming quarters will reveal whether efficiency gains, automation, and restrained wage growth can fully counterbalance higher statutory employee costs—or whether margins face a gradual squeeze in the years ahead.
