Tata Consultancy Services (TCS), Infosys and HCLTech together incurred additional expenses of about Rs 4,373 crore in the quarter ended December 2025 due to the implementation of new labour laws, a move
that weighed heavily on profitability and led to a double-digit decline in net profit for all three companies.
Infosys, in its quarterly results announced on January 14, said it incurred extraordinary expenses of Rs 1,289 crore during the quarter. The company attributed the cost to higher gratuity liabilities and the recalculation of employee leave under the new regulations. TCS, which announced its results on January 12, reported additional expenses of Rs 2,128 crore, while HCLTech said it incurred incremental costs of Rs 956 crore on account of the same changes.
When it comes to operating margins, however, the impact varied across companies. TCS managed to hold its operating margin steady at 25.2% despite cost pressures. HCLTech reported a marginal improvement, with margins rising to 18.6%. Infosys, on the other hand, saw a sharp contraction, with operating margins falling to 18.4% from 21% in the previous quarter. The company clarified that excluding labour code-related expenses, its operating margin would have stood at around 21.2%.
All three companies have indicated that the impact of the new labour laws will be limited in the coming quarters, estimating a margin impact of only 10-20 basis points.
TCS said that of the total Rs 2,128 crore expense, around Rs 1,800 crore was related to gratuity, while about Rs 300 crore was linked to adjustments in leave-related liabilities. Speaking during the post-earnings call, TCS CFO Samir Seksaria said the expenses were related to past services and would not significantly impact margins going forward.
Explaining how productivity and efficiency gains played a key role in offsetting cost pressures, Seksaria said, “Overall margins were stable at 25.2%. We had a benefit of 80 basis points from productivity, pyramid optimisation and operational efficiencies, and a further 20 basis points benefit from currency due to rupee depreciation. That was offset by 50 basis points from the full-quarter impact of wage hikes effective September 1, and another 50 basis points from investments in partnerships and brand initiatives.”
Infosys CFO Jayesh Sanghrajka said the labour code would have an annual margin impact of around 15 basis points. “Going forward, this will be a regular impact of the labour code,” he said.
HCLTech, meanwhile, reported a one-time expense of approximately Rs 956 crore. Addressing analysts at an earnings conference in Noida, HCLTech CEO C Vijayakumar said the financial impact of the labour code would remain limited. “The expenses under the labour code will be very limited going forward. It could be around 10 to 20 basis points,” he said.
What do brokerage firms think?
Brokerage firms have taken a more cautious view than company managements. Jefferies, for instance, said the impact of the new labour laws cannot be treated as a one-time cost. The brokerage expects margin pressures on IT companies to intensify over time, potentially resulting in slower salary growth.
Under the new regulations, employee salaries must account for at least 50% of total cost-to-company (CTC), with benefits such as provident fund and gratuity calculated on this higher base. This change is expected to raise recurring employee costs while also creating a sizeable one-time financial impact.
In its report, Jefferies said the new labour codes, combined with slower revenue growth, a shift towards AI-led business models and higher onsite salaries due to H-1B visa-related changes in FY 2027–28, could further compress margins. The brokerage estimates that a 2% rise in Indian employee costs could translate into a 2-4% cut in earnings estimates for FY 2027. Companies, it said, may attempt to partially offset this pressure by curbing salary hikes at senior levels.
What’s in the new labour code?
The new labour code, which came into effect in November 2025, is aimed at improving employee pay structures, job security and access to social security benefits. For the IT and IT-enabled services sector, the changes include assured social security even for fixed-term employees, mandatory issuance of appointment letters, higher basic salaries, fixed working hours and provisions allowing women to work night shifts, subject to safety norms.
Overall, while the new labour laws are expected to strengthen employee welfare, they present a fresh financial challenge for companies already grappling with margin pressures. How India’s IT majors balance higher compliance costs with profitability will be closely watched in the months ahead.
The changes under the labour code mandate that basic salary form at least 50% of total CTC, leading to higher contributions towards provident fund and gratuity and a larger payout upon retirement or exit. While take-home pay may see a marginal reduction, employees will be able to carry forward unused leave, opt for leave encashment, and benefit from enhanced social security coverage.
Gig workers, delivery partners and freelancers will be brought under government-backed social security and insurance schemes. The code also enforces equal pay for equal work, mandates regular health check-ups, requires appointment letters for all employees and places responsibility on employers to ensure workplace safety for women across all shifts.
