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Major Indian technology companies recorded a sharp decline in profits for the quarter ended 31 December 2025. Eventually this downturn stems from the central government's notification of the new Labour Codes on 21 November 2025. To comply with the updated legal framework, firms had to set aside substantial "one-time" provisions to cover increased employee benefit liabilities.
The wage definition shift
The primary cause of the profit drop is a fundamental change in how the law defines "wages." Under the Code on Wages, 2019, and the Code on Social Security, 2020, "wages" must now constitute at least 50% of an employee’s total Cost to Company (CTC).
Historically, many IT firms structured salaries with a low basic pay and high allowances to manage tax and social security contributions. The new "50% Rule" forces companies to include previously excluded allowances in the calculation base for statutory benefits. This expansion directly increases the cost of:
Gratuity: Payments made to employees after five years of service (or one year for fixed-term staff).
Leave Encashment: Payments for unused leaves.
Provident Fund (PF): Monthly retirement savings contributions.
Financial fallout by the numbers
The three largest players in the industry reported a combined exceptional hit of approximately Rs 4,373 crore during the December quarter.
| Company | One-Time Labor Code Provision | Net Profit Impact |
| TCS | Rs 2,128 crore | 13.9% Year-on-Year drop |
| Infosys | Rs 1,289 crore | 2.2% Year-on-Year drop |
| HCLTech | Rs 956 crore | 11.2% Year-on-Year drop |
Without these mandated accounting adjustments, TCS reported that its profit would have grown by 8.5% rather than declining.
Broader structural changes
Beyond the immediate financial charges, the labour codes introduce several shifts in operational requirements:
Fixed-Term Equality: Employees on fixed-term contracts are now eligible for gratuity after just one year of service, rather than five.
Settlement Speed: Employers must now pay "full and final" wages within two working days of an employee leaving the company.
Overtime Rules: The codes mandate overtime pay attwice the normal rate for work exceeding standard hours, a significant change for the service sector.
Impact on employee take-home pay
While the codes increase the long-term social security safety net for workers, they may reduce immediate take-home pay. Because a larger portion of the salary now qualifies as "wages," employee contributions to PF and taxes will rise.
It is anticipated that while the initial "past service" provisions caused a sudden profit shock, the recurring impact on operating margins will settle at approximately10 to 20 basis points in future quarters.