Is the new Labour Codes introduced by Indian government, an another risk to earnings? Two of India’s IT majors Tata Consultancy Services (TCS) and HCLTech, reported a sharp decline in Q3 profit as a result of the the new labour code and restructuring expenses. Jefferies in its report noted that the impact is not one time on profit but it is also recurring in nature as the employee cost will rise sustainably. The brokerage said the changes may hit company profits by as much as 10–20% in Q3FY26, while recurring employee expenses could rise by up to 5%.
TCS incurred an impact of Rs 2,128 crore in Q3FY26 as a result of the new labour codes. HCLTech saw a one-time impact of Rs 956 crore.
The big question is how would the labour code impact margins of IT firms going forward.
What are the new labour codes?
Before we move any further a quick look at what the new labour code encompass. The Government has consolidated 29 existing labour laws into four new labour codes, which came into effect from November, 2025. These codes introduce a uniform definition of wages and change how employee benefits are calculated.
Under the new rules, wages—including basic pay, dearness allowance and retention allowance—must account for at least 50% of an employee’s total cost to company. This will directly impact how companies calculate Provident Fund, gratuity, leave encashment and ESI contributions.
Gratuity, leave liabilities to rise sharply, trigger one-time profit hit
Jefferies said the change in wage definition will lead to a 27–70% increase in gratuity and leave encashment liabilities for IT firms. Companies will have to reassess these liabilities, resulting in a one-time hit to profits in the December 2025 quarter (Q3FY26).
The brokerage estimates this reassessment alone could reduce quarterly profits by 10–20% at the lower end.
In-hand salaries may fall, net employee costs to rise
The new labour codes will also raise employee costs on a recurring basis. With a higher portion of salaries moving into wages, employee provident fund and gratuity contributions will increase every year.
Jefferies noted that in-hand salaries could fall by 4–6% if companies continue to contribute 12% of wages to PF. To soften the impact, some firms may opt for the statutory PF contribution of Rs 21,600 annually, subject to clarity under the Code on Social Security.
Even after such adjustments, the brokerage expects net employee costs to rise.
Jefferies in IT firms: Labour cost rise may hit FY27 earnings by up to 4%
According to Jefferies, a 2% increase in India employee costs could cut FY27 earnings estimates by 2–4%.
Coforge, LTIMindtree and Tech Mahindra are likely to face the highest impact due to their relatively lower margin buffers. In contrast, Infosys and IKS are expected to be the least affected, supported by stronger margins.
More pressure on IT margins
Jefferies pointed out that the new labour codes will add to existing challenges for IT firms. These include slower revenue growth, a shift towards AI-led services that offer lower margins, and the risk of higher onsite wages in FY27 and FY28 due to changes in US H1B visa norms.
Jefferies added that it prefers mid-cap IT companies over large caps, even as the sector navigates higher costs and tighter margins under the new labour framework.