Labour Reforms Deliver Earnings Shock to Corporate India
The third quarter financial results for Indian companies are showing clear signs of strain. A major factor behind this pressure stems from recently implemented labour regulations. These new codes have increased mandatory wage-linked contributions, pushing up overall payroll costs during the December quarter.
IT Sector Bears the Brunt of Regulatory Changes
Information technology firms are experiencing the most pronounced impact. This sector relies heavily on a large domestic workforce, making it particularly vulnerable. Since a substantial part of operating costs is tied to salaries and benefits, even modest increases in wage obligations can significantly squeeze profit margins.
The effect is already visible in early earnings reports. Tata Consultancy Services disclosed an expense of Rs 2,128 crore specifically due to the new labour codes. This accounted for roughly 12 percent of its profit before tax and led to a 14 percent drop in net profit. The company stated it assessed the impact based on legal opinion and guidance from the Institute of Chartered Accountants of India.
Infosys reported adjustments totalling $143 million (Rs 1,289 crore) for increased gratuity and leave liabilities. This contributed to a 2.2 percent decline in its quarterly net profit. Similarly, HCL Technologies recorded a related expense of Rs 956 crore, which shaved 11.2 percent off its profit.
Understanding the New Labour Framework
The government notified four consolidated labour codes in late November 2025. These new laws combine 29 previous regulations into a simpler framework. A key change mandates that basic pay and dearness allowance must constitute at least 50 percent of an employee's total salary, up from the previous range of 25-40 percent.
This shift increases the base for calculating benefits like provident fund and gratuity. Employers contribute a minimum of 12 percent of basic salary to the Provident Fund each month. Furthermore, the eligibility period for gratuity for fixed-term employees has been reduced from five years to just one year.
The Institute of Chartered Accountants of India required companies to account for these changes starting in the December quarter itself, leading to the immediate financial impact.
Broader Sector Impact and Future Outlook
Analysts note the pain extends beyond IT. Global firm Jefferies expects a one-off cost hit this quarter for many companies. Sectors like capital goods, retail, pharmaceuticals, and banks will also feel the effects. Companies with a higher share of India-based employee costs relative to profits will see a recurring impact.
For the IT industry specifically, Jefferies warns the situation is concerning. The new laws could cause a one-time profit reduction of 10-20 percent in Q3. Going forward, recurring costs might push employee expenses up by as much as 5 percent in subsequent quarters. A 2 percent rise in costs for Indian employees could lower earnings estimates for the industry by 2-4 percent for FY27.
Other companies identified as facing significant impact include BHEL, Larsen & Toubro, Zomato's parent Eternal, Nykaa's parent FSN E-Commerce, Tech Mahindra, and LTIMindtree.
Navigating the New Normal
Analysts admit pinpointing the exact financial impact is challenging due to limited data. Much will depend on how companies respond. Many may implement cost-cutting measures, such as offering lower wage hikes or conducting more layoffs, to manage the increased financial burden.
While companies will continue to shoulder these additional expenses in the coming quarters, the intensity of the earnings hit is expected to lessen after Q3. The reasoning is that much of the immediate cost adjustment is being absorbed now, resulting in a near-term shock rather than a prolonged drag on profitability.
The new labour codes mark a significant shift in India's corporate landscape, with their full financial implications still unfolding across the economy.
