Labour Codes Hit Q3 IT Profits: Will Infosys, Wipro And Tech Mahindra Also Face The Brunt?

India’s new labour codes have begun to show up in IT sector earnings, triggering one-time profit hits in Q3 FY26 for TCS and HCLTech. The codes, which redefine “wages”, expanding the base for gratuity, provident fund and leave encashment, forcing companies to recognise higher past service liabilities, are a material issue for employee-intensive IT services companies.

A look at the Q3 earnings reveal that while numbers were in line with estimates for TCS, profit growth was weaker than expected. Net profit was down 11.7% as compared to street expectations of 6.6% increase. Net profit came in at Rs 10,657 crore as compared to street estimates of Rs 12,868.39 crore, a down tick of 17.2%.

Similarly, HCLTech numbers largely beat estimates, except on profit. Net profit declined 3.77% as compared to street expectations of 10.8% growth. In absolute terms, the company posted a profit of Rs 4,076 crore, well below the estimated Rs 4,702.40 crore—a miss of about 13%.

TCS booked a one-time labour code provision of Rs 2,128 crore, including Rs 1,800 crore toward gratuity and Rs 300 crore toward leave liabilities, contributing to a total profit impact of Rs 3,391 crore when combined with legal and restructuring costs.

HCLTech took a labour code-related charge of Rs 956 crore, dragging profits below estimates despite revenue growth.

Both companies stressed the charges were non-recurring. TCS said the labour code impact had been treated as "past service costs and classified as one-time exceptional items,” while HCLTech noted that “the one-off charge related to the labour code has already been taken in the P&L.” Management at both firms guided that the recurring margin impact should be limited to 10–20 basis points, assuming there were no further regulatory changes.

Crucially, the earnings hit was regulatory, and not demand-led. HCLTech delivered its highest sequential constant-currency revenue growth in eight quarters, which came in at 4.2%, as against 2.4% in Q2.

The company also upgraded service revenue guidance 4.75–5.25%, as against the earlier forecast of 4–5%). It also revised its revenue growth guidance for FY26 to 4–4.5% in constant-currency terms, versus 3–5% earlier.

TCS reported improving revenue growth, Q3 constant-currency growth came at 0.8% vs the street was estimating a rise by 0.5% & deal wins of $9.3 billion, and announced a bumper dividend of Rs.57 per share, reinforcing confidence in cash flows.

While the initial impact is being treated as a clean-up exercise, brokerages warn of structural cost implications. Jefferies estimates that a 2% increase in Indian employee costs could reduce FY27 earnings by 2–4%, with firms having a larger India-based workforce more exposed.

With TCS and HCLTech setting the template, investor focus now shifts to Infosys, Wipro and Tech Mahindra, where similar one-time charges cannot be ruled out as companies align employee liabilities with the new labour framework.