The implementation of the new labor law has resulted in extraordinary costs for Tata Consultancy Services (TCS), Infosys, and HCLTech totaling more than Rs 4,373 crores.
Impact on IT Giants’ Earnings
The three largest IT services companies in the nation had a sharp double-digit drop in earnings in the third quarter that concluded on December 31 as a result.
Due to the statutory effect of new labor rules, Infosys announced an unusual charge of Rs 1,289 crore in its December quarter results release on January 14. The labor code amendments result in an increase in leave responsibility as well as a gratuity obligation due to previous service costs.
TCS and HCLTech Exceptional Charges
On January 12, Tata Consultancy Services (TCS) and HCLTech recorded an unusual charge of Rs 2,128 crore and Rs 956 crore, respectively, due to new labor rules. While HCLTech increased its operating margin to 18.6% and TCS maintained a sequentially stable operating margin at 25.2% in Q3 despite cost headwinds from labor code compliance, Infosys suffered.
In Q3, Infosys reported an operating margin of 18.4%, a notable decrease from 21% in the prior quarter. However, it also said that, in the absence of labor code-related expenses, the adjusted margin would have been around 21.2%.
Future Margin Impact
The new labor law will have relatively little effect on margins in the next quarters, according to all three corporations. Managers of the company anticipate that these modifications will have an effect of around 10–20 basis points.
New Labour Code Provisions
The new Labour Code, which went into effect in November 2025, brought about a number of improvements that set the groundwork for improving welfare, social security, safety, and salaries for India’s workers.
The four new labor laws required fixed-term employment, obligatory appointment letters, greater base salary, and set work hours in order to provide social security benefits for the IT/ITes industry. It requested that IT companies allow women to work nights at all institutions, giving them the chance to make more money.
Breakdown of Costs
TCS claims that of the Rs 2,128 crores it spent adjusting to the new labor law, around Rs 1,800 crores went toward gratuity payments, while an additional Rs 300 crores went toward adjusting leave liabilities.
“All of this is a quick service fee that will continue to occur. We anticipate that this will have a negligible effect, between 10 and 15 bps. Samir Seksaria, CFO of TCS, said on the company’s post-earnings analyst call, “We do not foresee (any extra expenses), until the guidelines offer greater clarity.”
Jayesh Sanghrajka, the CFO of Infosys, also pointed out that this expenditure would continue to have an annual effect of around 15 basis points. “As we go forward, it will be a regular effect of the labor law,” he said.
The one-time cost to HCLTech of making the necessary adjustments to comply with the rules was about $109 million. “We notice extremely low continuing expenses in accordance with the labor legislation. It would be in the region of 10 to 20 basis points,” HCLTech CEO C Vijayakumar said during the company’s results presentation in Noida.
💼 Labour Law Adjustment Costs
- TCS: Rs 2,128 crore
- Infosys: Rs 1,289 crore
- HCLTech: Rs 956 crore
- Gratuity Impact: TCS – Rs 1,800 crore
- Leave Liability: TCS – Rs 300 crore
- Expected Ongoing Impact: 10–20 bps on margins
Brokerage Perspective
This is not considered a one-time expense by brokerages like Jefferies. They are preparing for future pressure on IT businesses’ margins, which might eventually result in reduced salary increases.
According to labor rules, employee pay must be at least 50% of the cost to the firm (CTC), and perks like gratuities and provident funds must be based on salaries. This is anticipated to have a significant one-time financial effect in addition to increasing ongoing personnel expenses for IT firms.
According to a report from Jefferies, “new labor laws will contribute to the margin headwinds from slower revenue growth, AI-led business mix shift, and possibly greater onsite salary rises in FY27 and FY28 owing to changes in H-1B visa standards.”
It further said that IT businesses’ projected FY27 profitability might drop by 2–4% with a 2% rise in Indian personnel expenses. Lower salary increases, particularly at senior levels, are anticipated to somewhat mitigate the effect.
⚠️ IT Industry Wage Impact
- Minimum Salary: 50% of CTC
- Social Security: Gratuity & Provident Fund based on wages
- Ongoing Margin Impact: 10–20 bps
- Potential FY27 Earnings Drop: 2–4%
- Offset Strategy: Lower wage hikes at senior levels
Frequently Asked Questions
1. Why were TCS, Infosys, and HCLTech charged more than ₹4,000 crore?
The imposition of India’s new labor laws, which raised obligations for gratuities and leave encashment for prior employee service, gave rise to the charges.
2. In Q3, which business had the most labor code-related expenses?
The largest extraordinary charge was ₹2,128 crore for TCS, ₹1,289 crore for Infosys, and ₹956 crore for HCLTech.
3. How were operating margins affected by the new labor regulations?
These expenses caused Infosys’s margin to drop sharply to 18.4% in Q3, while TCS and HCLTech were able to maintain or somewhat increase their margins. The effect is mostly one-time, according to adjusted margins.
4. Will labor laws eventually have an impact on the profit margins of IT companies?
The management of all three businesses anticipates a small, continuous effect on margins in upcoming quarters of between 10 and 20 basis points.
5. How does the IT industry evolve as a result of the new labor laws?
Higher base salary (at least 50% of CTC), greater social security benefits, set work schedules, required appointment letters, and provisions for women to work nights with protections are also required under the regulations.
Conclusion
For India’s leading IT firms, the introduction of new labor laws resulted in large one-time expenses in Q3, which temporarily reduced profitability, particularly for Infosys. Nonetheless, management of the firm is still optimistic that the long-term effect on margins would be negligible.
The changes seek to improve staff welfare, transparency, and social security across the industry, but brokerages warn of persistent margin pressure despite slowing growth and increased personnel expenses.
Disclaimer
This summary is for informational purposes only and does not constitute financial, investment, or legal advice. Readers should verify facts independently and consult professional advisors before making any decisions.
