India’s recently introduced labour codes are set to increase the cost of employing staff in the IT sector, putting extra pressure on company margins and lowering profit expectations for the next few years.
What the new labour codes require
Effective from November, the rules state that an employee’s wage must be at least 50% of the total cost to company (CTC). Benefits like provident fund and gratuity will now be calculated on the wage component, not the full CTC.
How this adds to IT company costs
Because of the new definition of wages, IT firms will see a rise in recurring employee expenses. Analysts estimate that a 2% rise in Indian staff costs could cut FY27 earnings estimates by 2‑4% for these companies.
Companies may try to offset part of the hit by limiting salary increases, especially for senior staff.
Impact on major IT firms
- HCLTech posted an 11.2% drop in net profit for the Oct‑Dec quarter, mainly due to a one‑time provision of about ₹900 crore linked to the labour codes. Without this one‑off item, profit would have been higher.
- Tata Consultancy Services (TCS) saw a 13.9% profit decline for the same period. A statutory impact of ₹2,128 crore from the new rules was recorded; excluding it, profit would have grown about 8.5%.
What this means for investors
Margins for Indian IT firms are likely to be squeezed in FY27‑28 as they adjust to higher payroll costs and slower revenue growth from shifts toward AI‑driven services. Keep an eye on salary hike trends, especially at senior levels, and watch how companies manage the one‑time provisions.
Disclaimer
Remember, this is perspective, not a prediction. Do your own research and consider consulting a certified financial adviser before making any investment decisions.