India's new labor codes, which came into effect on November 21, 2025, are impacting the profitability of the country's largest IT services companies. These codes consolidate 29 existing labor laws into four, covering wages, industrial relations, social security, and occupational safety and working conditions. The new regulations have led to increased statutory payouts for companies, particularly concerning provident fund and gratuity contributions.
The "Big Five" Indian IT firms—Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro, and Tech Mahindra—have collectively borne ₹4,645 crore ($500 million) in upfront costs in the December quarter. This substantial impact is primarily due to the revised definition of wages, which expands the base for calculating contributions to employee retirement benefits. The requirement has reduced profitability by 260-320 basis points for these firms in the October-December 2025 period.
Specific Company Impacts
Tata Consultancy Services Ltd (TCS), the largest software services provider in India, reported incremental costs of $238 million due to the new labor codes. This included ₹2,128 crore (approximately $256 million) as an expense related to the statutory impact, leading to a 14% fall in the company's consolidated net profit for the third quarter. Of this, ₹1,816 crore was for additional gratuity costs and ₹312 crore for long-term compensated absences.
Infosys Ltd, the second-largest IT company, disclosed a $143 million impact on its quarterly earnings. HCL Technologies Ltd faced a $109 million impact, while Wipro Ltd and Tech Mahindra Ltd reported impacts of $33.3 million and $30 million, respectively. HCLTech reported a ₹956 crore (approximately $115 million) impact on earnings before interest and tax (EBIT).
Changes in Wage Structure
A significant change under the new labor codes is the requirement for basic pay and dearness allowance to constitute at least 50% of an employee's salary. Earlier, companies had the flexibility to structure salaries with a lower basic pay component and higher allowances, reducing statutory payouts. The new rule mandates that if allowances exceed 50%, the excess is added back into wages, automatically increasing social security costs. Consequently, benefits like gratuity and provident fund are expected to rise.
Industry Response and Future Outlook
While companies will continue to bear additional expenses related to the labor reforms in the coming quarters, the intensity of the impact is expected to taper off after the third quarter. IT firms are also expected to moderate future salary hikes, particularly for senior employees, to offset the higher statutory deductions. Some analysts estimate that a 2% increase in costs of Indian employees for the industry may hit earnings estimates for FY27 by 2-4%.
The long-term effects of these labor code reforms are still unfolding. While the immediate impact involves increased costs and compliance adjustments, the reforms aim to provide greater flexibility in hiring and workforce management, which could improve productivity over time. Moreover, better labor standards and compliance may enhance India's global competitiveness in IT services. However, some worry that the IT sector could be moving into a lower margin reality.
Impact on Employees
For employees, the immediate effect is likely to be felt in lower monthly take-home pay, especially at senior levels. As the basic salary component rises to meet the 50% requirement, PF and gratuity deductions increase.
