The government is yet to make the new labour codes fully effective, but they are already impacting the bottomlines of Indian IT giants. During the third quarter of FY26, TCS, Infosys and HCLTech together incurred Rs 4,373 crore as additional cost.
The new labour codes, notified in November last year, consolidate existing laws. They introduce a revised definition of wages, raising the basic pay and employer obligation for gratuity and leave encashment. They also require companies to recognise gratuity liabilities from past services.
IT companies signal that they’ve already absorbed the bulk impact and that the recurring effect on margins will be limited.
Margin Expansion
In the Q3 earnings call, Infosys chief financial officer Jayesh Sanghrajka said the implementation of the labour codes has led to a rise in gratuity and leave liabilities, aggregating to $143 million (₹1,289 crore).
“But if you look at the adjusted margins, they actually expanded by 20 basis points,” Sanghrajka said.
Full-year margins remain at 21%. This is similar to last year, despite investments in sales and marketing that would have impacted margins by 50 basis points, and the impact of lower utilisation as we build capacity for the future, he explained.
Infosys reported a net profit of ₹6,654 crore in Q3, down 2.2% year-on-year.
HCLTech made similar disclosures. In his remarks, chief executive officer and managing director C Vijayakumar said operating margin for the quarter, “excluding the one-time impact of new labour code, came at 18.6%.”
According to the company, the new labour codes have resulted in an estimated one-time increase of ₹956 crore in provision for employee benefits. The company’s net profit also declined 3.7% quarter-on-quarter to ₹4,076 crore.
CFO Shiv Walia later clarified that the one-off charge had already been taken and that “going forward, we don’t expect this to be more than 10 to 20 basis points on a recurring basis,” adding that this was subject to “any further changes in the labour code regulation.”
TCS disclosed the largest absolute provision among the three. CFO Samir Seksaria said the company had made a provision of ₹2,128 crore, explaining that “gratuity amounts to about ₹1,800 crore and leave liability is balance ₹300 crore.”
The labour law provisions also dented its bottomline, earning ₹10,657 crore in netprofit—a 14% YoY decline.
He described this as “all past service cost,” and said that on an ongoing basis, “the impact of this we expect to be not very significant in the range of about 10 to 15 basis points.”
Though the companies have maintained that the provision is one-time, Jefferies, in its report, noted that the impact of the new labour codes is also recurring in nature, as the employee cost will rise sustainably.
The brokerage said the changes may hit company profits with recurring employee expenses rising by up to 5%.
Wipro said the implementation of the labour code led to a ₹302-crore increase in gratuity expenses during the quarter.
Pricing, Contracts, and Renewals
On pricing and contract economics, executives focused on productivity rather than changes to underlying commercial structures.
Infosys’s Sanghrajka said evolving technologies were prompting experimentation. “As newer and newer technologies evolve, every time there is a change like that, you see a new pricing model evolving as well,” he said, referring to “outcome-based pricing” and “pricing which is specific to agents.”
He cautioned, however, that it was “a little early… in terms of calling out specifically what pricing models are going to evolve.”
TCS is also continuing to embed productivity gains. Responding to an analyst question, executives said that “most of the renewals would take in some productivity, but that is business as usual,” typically “in the range of 10%–15% over the term of the contract.”
They added that this did not necessarily reduce revenue, as “very often when the renewal happens the top line… doesn’t decrease,” because “the quantity of work that we commit to deliver… increases.”
On whether AI was leading to more flexible contract structures, TCS said, “We are not seeing flexibility in the contract. Most contracts bake in the expected productivity.”HCLTech’s Vijayakumar said the company would “remain disciplined to walk away from those [deals] that do not align with our financial and strategic objectives.”
“While we continue to win many such large deals, we remain disciplined to walk away from those that do not align with our financial and strategic objectives. We continue to guide our sales organisation and remain focused on opportunities that make long-term economic sense.”
The post Indian IT Absorbs Labour Codes Costs, But Recurring Expenses May Hit Margins appeared first on Analytics India Magazine.
