Labour Codes: India Inc working on strategies to comply with new employee benefits norms
Experts note that several companies are awaiting final rules, others are restructuring salaries; a one-time impact is likely
- Jan 20, 2026,
- Updated Jan 20, 2026 3:09 PM IST
Even as several IT majors accounted for the impact of the Labour Codes in their third quarter results, many other firms are still working on their salary restructuring plans and fine-tuning them with the appraisal cycle.
Almost all companies will face a one-time hit, which may be evident in the coming quarters, but several await the notification of the rules to make the changes.
IT majors including TCS, HCLTech and Infosys made a one-time provision for employee benefits due to the new Labour Codes in their Q3 results. Global brokerage firm Jefferies said in a note that the Codes could add margin pressure to IT companies, adding that these will not be one-time changes. It also warned that the changes could hit these companies’ profits by as much as 10-20% in the third quarter of the fiscal. Recurring employee expenses could increase by up to 5%.
At the heart of the changes in the wage bill are revised gratuity provisions, which kick in for fixed-term employees after they earn one month of salary, as well as a new definition of wage, which would account for 50% of the employee’s total cost to company. It also includes enhanced benefits for leave.
Most other employers are understood to be awaiting clarity on the rules. While the Ministry of Labour and Employment has released FAQs on various provisions of the Labour Codes, rules for many provisions are still being finalised. It is likely that these could be notified from April 1, 2026, tying it up with the new financial year from when most companies give effect to salary revisions.
Sandeep Jhunjhunwala, Partner at Nangia Global, noted that the Q3 results declared so far that explicitly factor in the financial implications of new labour codes, have been largely confined to India’s IT services companies, making them the first segment of corporate to quantify this impact. “Overall, the evidence suggests that Labour Code impact is primarily an issue of accounting timing and earnings optics rather than a structural compression of operating margins, with other sectors likely to experience similar episodic effects as implementation progresses,” he said.
Although the adjustment has been disclosed only in absolute terms and consistently characterised as an exceptional item, implied analysis indicates a relatively modest effect of approximately 0.3-3% on quarterly revenue, alongside a materially higher impact of about 7-20% on quarterly profits, varying by company size. The impact has been largely front-loaded through provisions for gratuity, leave encashment and employee benefit recalibration, temporarily distorting reported quarterly margins, while mitigating the risk of a sustained drag on profitability, he further said.
From an income tax perspective, the upfront recognition of such provisions has increased the current tax liability in the year of recognition while simultaneously giving rise to a deferred tax asset, reflecting the timing difference between accounting recognition and income tax deductibility.
Arjun Paleri, Partner, BTG Advaya said there are three ways that companies are considering compliance with the Labour Codes; especially during the third quarter of the fiscal. The first approach is to wait and watch, as the state and central rules have not yet been brought into force. The second approach involves partial implementation of the Codes by restructuring wages and salary components, with the aim to implement these changes in the first quarter of FY27 when the next appraisal cycle comes into force and effect. “At a financial level, these companies are making provisions for the potential higher outlay or outflow of statutory benefits, but they are not implementing the changes yet,” he said.
The third approach is where companies are complying immediately with the labour codes, except for the Employee Provident Fund requirements which have not been brought into force yet. There are many IT companies that are using the third approach and at a financial level, these companies are making provisions for the higher outlay or outflow of statutory benefits, he further explained.
Even as several IT majors accounted for the impact of the Labour Codes in their third quarter results, many other firms are still working on their salary restructuring plans and fine-tuning them with the appraisal cycle.
Almost all companies will face a one-time hit, which may be evident in the coming quarters, but several await the notification of the rules to make the changes.
IT majors including TCS, HCLTech and Infosys made a one-time provision for employee benefits due to the new Labour Codes in their Q3 results. Global brokerage firm Jefferies said in a note that the Codes could add margin pressure to IT companies, adding that these will not be one-time changes. It also warned that the changes could hit these companies’ profits by as much as 10-20% in the third quarter of the fiscal. Recurring employee expenses could increase by up to 5%.
At the heart of the changes in the wage bill are revised gratuity provisions, which kick in for fixed-term employees after they earn one month of salary, as well as a new definition of wage, which would account for 50% of the employee’s total cost to company. It also includes enhanced benefits for leave.
Most other employers are understood to be awaiting clarity on the rules. While the Ministry of Labour and Employment has released FAQs on various provisions of the Labour Codes, rules for many provisions are still being finalised. It is likely that these could be notified from April 1, 2026, tying it up with the new financial year from when most companies give effect to salary revisions.
Sandeep Jhunjhunwala, Partner at Nangia Global, noted that the Q3 results declared so far that explicitly factor in the financial implications of new labour codes, have been largely confined to India’s IT services companies, making them the first segment of corporate to quantify this impact. “Overall, the evidence suggests that Labour Code impact is primarily an issue of accounting timing and earnings optics rather than a structural compression of operating margins, with other sectors likely to experience similar episodic effects as implementation progresses,” he said.
Although the adjustment has been disclosed only in absolute terms and consistently characterised as an exceptional item, implied analysis indicates a relatively modest effect of approximately 0.3-3% on quarterly revenue, alongside a materially higher impact of about 7-20% on quarterly profits, varying by company size. The impact has been largely front-loaded through provisions for gratuity, leave encashment and employee benefit recalibration, temporarily distorting reported quarterly margins, while mitigating the risk of a sustained drag on profitability, he further said.
From an income tax perspective, the upfront recognition of such provisions has increased the current tax liability in the year of recognition while simultaneously giving rise to a deferred tax asset, reflecting the timing difference between accounting recognition and income tax deductibility.
Arjun Paleri, Partner, BTG Advaya said there are three ways that companies are considering compliance with the Labour Codes; especially during the third quarter of the fiscal. The first approach is to wait and watch, as the state and central rules have not yet been brought into force. The second approach involves partial implementation of the Codes by restructuring wages and salary components, with the aim to implement these changes in the first quarter of FY27 when the next appraisal cycle comes into force and effect. “At a financial level, these companies are making provisions for the potential higher outlay or outflow of statutory benefits, but they are not implementing the changes yet,” he said.
The third approach is where companies are complying immediately with the labour codes, except for the Employee Provident Fund requirements which have not been brought into force yet. There are many IT companies that are using the third approach and at a financial level, these companies are making provisions for the higher outlay or outflow of statutory benefits, he further explained.