New labour codes cost TCS, Infosys, HCLTech over Rs 4,000 crore in Q3

The new Labour Code that came into effect in November 2025 introduced a slew of changes that laid down the foundation for ensuring better wages, safety, social security, and enhanced welfare for India’s workforce

• TCS, Infosys, and HCLTech took Rs 4,373 crore charges due to new labour codes
• Infosys' Q3 operating margin fell to 18.4% after labour code costs
• Ongoing impact on margins expected to be minimal, around 10-20 basis points

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Tata Consultancy Services (TCS), Infosys and HCLTech have incurred over Rs 4,373 crores in exceptional charges pertaining to the implementation of new labour code. This had led to steep double-digit decline in profits for the country’s three biggest IT services giants in third quarter ended December 31.

On January 14, Infosys reported a Rs 1,289 crore exceptional charge in its December quarter earnings report on account of the statutory impact of new labour codes. The adjustments for labour codes represent an increase in gratuity liability arising out of past service cost and an increase in leave liability.

Tata Consultancy Services (TCS) on January 12 reported Rs 2,128 crore and HCLTech Rs 956 crore exceptional charge on account of new labour codes.

How did this impact margins?

While TCS has managed to retain sequentially flat operating margin at 25.2 per cent in Q3 despite the cost headwinds from labour code implementation and HCLTech grew its operating margin to 18.6 per cent, Infosys took a hit.

Infosys reported an operating margin of 18.4 per cent in Q3, a significant decline from 21 per cent in the previous quarter. But, it added that the adjusted margin would be around 21.2 per cent, had there not been the labour code related costs.

All the three companies have maintained that the new labour code will have very limited impact on margins in the coming quarters. Company managements expect an impact of around 10-20 bps due to these changes.

What did the company executives say?

The new Labour Code that came into effect in November 2025 introduced a slew of changes that laid down the foundation for ensuring better wages, safety, social security, and enhanced welfare for India’s workforce.

For the IT/ITes sector, the four new Labour codes mandated guaranteed social security benefits through fixed-term employment, mandatory appointment letters, higher basic pay and defined work hours. It asked IT firms to facilitate women to work at night shifts in all establishments letting them get an opportunity to earn higher wages.

According to TCS, out of its Rs 2,128 crores spent to adjust with the new labour code, around Rs 1,800 crores went into gratuity amounts and another Rs 300 crores were to adjust leave liability.

“This is all fast service cost and will happen on an ongoing basis. The impact of this, we expect it to be not very significant, in the range of about 10-15 bps. We don't expect (any further costs), unless the rules give more clarity,” Samir Seksaria, CFO, TCS said at the company’s post-earnings analyst call.

Infosys CFO Jayesh Sanghrajka too called out that this spend will have an ongoing impact of roughly around 15 basis points on an annual basis. “That will be a regular impact of the labour code as we go ahead,” he said.

HCLTech saw an impact of about $109 million as a one-time cost to adjust with the mandated changes required to adhere to the codes.

“As per labour code, we see very minimal ongoing costs. It will be in the range of 10 to 20 basis points,” HCLTech CEO C Vijayakumar said during the company’s earnings conference in Noida.

 What are brokerages saying?

Brokerages such as Jefferies don't see this as a one-time cost. They are bracing for increased margin pressures for the IT companies going forward that would ultimately lead to lower wage hikes.

The labour codes mandate that employee wages must be at least 50 percent of cost to company (CTC), with benefits such as provident fund and gratuity to be calculated on wages.

This is expected to raise recurring employee costs for IT companies and also result in a large one-time financial impact.

"New labour codes will add to the margin pressures from slower revenue growth, AI-led business mix change and potentially higher onsite wage hikes in FY27 and FY28 due to changes in H-1B visa norms," Jefferies said in a note.

It added that a 2 per cent increase in Indian employee costs could reduce FY27 earnings estimates by 2-4 per cent for IT companies. Firms are likely to offset part of the impact through lower wage hikes, especially at senior levels.