New labour codes set to dent India Inc’s Q3 earnings, IT firms face margin pressure

The earnings performance of Indian corporates in the third quarter is likely to come under pressure, with information technology (IT) companies such as TCS and Infosys facing significant impact. A key factor behind this is the increase in employee-related expenses following the rollout of the new labour codes toward the end of November. These regulatory changes have raised mandatory wage-linked contributions, leading to a noticeable rise in overall payroll costs during the December quarter.

The IT sector is particularly vulnerable to these changes due to its reliance on domestic workforce and a large employee base. A substantial portion of its operating costs is tied to salaries and benefits so even a modest increase in wage-related obligations can have a disproportionate effect on margins. As a result, IT companies are witnessing weaker profitability in the December quarter compared to other sectors.

The effect of the new laws is already reflected in the third-quarter earnings reported so far.

IT bellwether Tata Consultancy Services (TCS) — which announced its results on Monday — divulged an expense of Rs 2,128 crore on account of “statutory impact of new labour codes”, which was around 12 per cent of profit before tax and exceptional costs. This led to a 14 per cent fall in the net profit of TCS. “TCS assessed and disclosed the incremental impact of these changes on the basis of legal opinion obtained and the best information available, consistent with the guidance provided by the Institute of Chartered Accountants of India (ICAI),” the company said.

“(TCS) Management also noted that ongoing restructuring in the workforce may continue in Q4 while labour code related impact may be minimal,” Elara Capital said in a report. TCS workforce has come down by around 31,000 in the last two quarters.

Infosys said the adjustments for labour codes represent an increase in gratuity liability arising out of past service cost and a rise in leave liability together by $143 million (Rs 1,289 crore) which is recognized in the Consolidated Statement of Comprehensive Income. As a result, the net profit of Infosys declined by 2.2 per cent for the third quarter.

HCL Technologies’ disclosed an expense of Rs 956 crore for the same, which was around 15 per cent of its profit before tax and exceptional costs. Its profit declined by 11.2 per cent in the quarter. “The recurring impact of the changes in the labour code is expected to be 10 to 20 bps annually, going forward,” an analyst with HDFC Securities said.

On November 21, 2025, the government notified the four labour codes — the Code on Wages, 2019, the Industrial Relations Code, 2020, the Code on Social Security, 2020, and the Occupational Safety, Health and Working Conditions Code, 2020 — consolidating 29 existing labour laws.  As part of the new labour laws, the basic pay component and dearness allowance has to constitute at least 50 per cent of employee salaries, compared to the 25-40 per cent basic pay mandated earlier. Thus, benefits such as gratuity and provident fund are also expected to rise. Employers are currently mandated to contribute at least 12 per cent to an employee’s basic salary monthly towards their Provident Fund. As per the new laws, the government lowered the service tenure for eligibility to gratuity of fixed-term employees to one from five years.

With the ICAI mandating companies to account for the new laws from the December quarter itself, experts see the changes impacting companies in the quarter.

Global firm Jefferies expects most companies to face a one-off cost during the quarter, with companies with higher share of India-based employee costs in their profit before tax seeing recurring impact. It will be spread across sectors such as capital goods, retail, IT, pharmaceuticals and banks, among others, it added.

The situation is particularly worrying for IT companies, as the new labour laws will not only have a one-time impact of 10-20 per cent of profits in the December quarter, but gross recurring impact may also lead to employee costs in the upcoming quarters rising by up to 5 per cent, Jefferies said.

The change in the wage structure will also lead to increase in gratuity and leave encashment liabilities for IT firms. A 2 per cent increase in costs of Indian employees for the industry may hit earnings estimates for FY27 by 2-4 per cent, Jefferies said.

BHEL, L&T, Zomato-parent Eternal, Nykaa-parent FSN E-Commerce, Tech Mahindra, and LTIMindree are among the other companies to see the biggest impact from the new rules, it added. The exact extent of the new laws’ impact is very difficult to earmark due to the limited data available, multiple analysts said. A lot would also depend on companies undertaking cost cutting measures such as lower wage hikes and more layoffs.

While companies will continue to bear additional expenses related to these labour reforms in the coming quarters, the intensity of the impact is expected to taper off after the third quarter. This is because much of the immediate cost adjustment is being absorbed upfront, resulting in an earnings hit in the near term rather than a prolonged one.