New Labour Code Dent Q3 Profits of TCS, Infosys, HCLTech by Over INR 4,000 Crore

The new labour code has resulted in exceptional costs totalling more than INR 4,373 crores for Tata Consultancy Services (TCS), Infosys, and HCLTech. As a result, the third quarter ending December 31 saw a sharp double-digit drop in profitability for the three largest IT services companies in the nation.

Due to the statutory impact of new labour rules, Infosys declared an unusual charge of INR 1,289 crore in its December quarter earnings release on January 14. Increases in leave liability and gratuity responsibility resulting from past service costs are reflected in the labour code changes. Due to new labour rules, TCS and HCLTech recorded extraordinary charges of INR 2,128 crore and INR 956 crore, respectively, on January 12. Let us explore how this will impact the operating ecosystem of these IT giants.

New Labour Code a Big Blow on Operating Margins

Despite the labour code implementation's cost challenges, TCS was able to maintain a sequentially flat operating margin in Q3 at 25.2%. Infosys suffered while HCLTech increased its operating margin to 18.6%. In Q3, Infosys reported an operating margin of 18.4%, a notable decrease from 21% in the prior quarter. However, it also stated that if labour code-related expenses had not been incurred, the adjusted margin would have been about 21.2%.

The three businesses have all insisted that the new labour law will not significantly affect their profit margins in the upcoming quarters. The company's management anticipates that these modifications will have an impact of roughly 10–20 basis points. This is not considered a one-time expense by brokerages like Jefferies. They are preparing for future pressure on IT companies' margins, which could eventually result in reduced wage increases. According to labour rules, employee pay must be at least 50% of the cost to the company (CTC), and benefits like gratuities and provident funds must be deducted from salaries. This is anticipated to have a significant one-time financial impact in addition to increasing ongoing personnel costs for IT firms.

What Changes New Labour Code Have Brought in?

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 workforce. The four new labour laws required the IT/ITes industry to provide assured social security benefits through mandatory appointment letters, greater basic salary, fixed-term employment, and set work hours.

It requested that IT companies allow women to perform night shifts in all establishments so they can get paid more. TCS claims that of the INR 2,128 crores it spent adjusting to the new labour law, about INR 1,800 crores went towards gratuity payments, while an additional INR 300 crores went towards adjusting leave liabilities. During the company's post-earnings analyst call, Samir Seksaria, CFO of TCS, stated that all of these expenses are related to quick service and will continue.

TCS anticipates that the impact will be minimal, ranging from 10 to 15 basis points. Unless the regulations provide further clarification, TCS does not anticipate any additional expenses. Jayesh Sanghrajka, the CFO of Infosys, further noted that this expenditure will have a recurring effect of about 15 basis points annually. "As we move forward, that will be a regular impact of the labour code," he stated. A one-time expense of over $109 million was incurred by HCLTech to make the necessary adjustments to comply with the standards.