Listen to this article in summarized format
Loading...
××
Subscribe to
Unlock AI Briefing and Premium Content
Subscribe NowWhat's Included
- Exclusive Stories
- Daily ePaper Access
- Smart Market Tools
- Curated Investment Ideas
- Ad-lite Experience
Subscription
Software services firms are feeling the pinch of India’s new labour codes on their margins as they start making provisions for the new accounting system. Operating margins have compressed by 70-210 basis points at Tata Consultancy Services (TCS), Infosys, and HCLTech after the companies took combined one-time provisions of Rs 4,373 crore in the December quarter to account for past service costs.
However, this is likely to result in recurring inflation of wage bills by 3%-5%, potentially impacting the upcoming increment cycle, experts said. To be sure, although the four labour codes have been passed, key rules, especially those on wage definition, accounting treatment of past service costs, provident fund, gratuity, leave encashment, and overtime are still under public consultation, with several states yet to notify their own rules.
Since labour is a subject under the Concurrent List, companies are waiting for clarity from both the Centre and states before restructuring salaries. Companies are also yet to begin informing staff on new salary structures since the rules under the new labour codes are still under public consultation.
Industry bodies, including the Confederation of Indian Industry (CII) have sought multiple clarifications, particularly on the accounting treatment of wage restructuring and employee benefit liabilities. According to estimates by brokerage firm Jefferies, a 2% rise in employee costs could shave off 2-4% from FY27 earnings for IT companies.
“The annual wage bill is likely to increase by approximately 3-5% on a recurring basis once the new structures are fully embedded,” said Deepti Thakkar, lead - employment and HR laws practice at law firm Nishith Desai Associates. “Given the calculation based on the revised definition of wages, the wage base is likely to double for many employees, with analysts estimating an approximately 25- 50% jump in gratuity reserves for companies,” she said.
The basic component is likely to double for many employees, also causing an increase in payouts for provident funds (PF). This means takehome salaries could also see a sharp dip, especially at senior levels, and could be between Rs 15,000- 35,000 per month due to higher taxes and PF cuts, depending on allowances and structuring, she explained.
“However, this outcome is not universal and will depend on how PF is applied (e.g., actual basic vs. capped at Rs 15,000) and on the existing compensation structure of the employer,” she said. Kamal Karanth, cofounder of specialist staffing firm Xpheno said IT firms have started making provisions for the higher costs and will have to change their salary structures for implementing the new labour codes.
However, this is likely to result in recurring inflation of wage bills by 3%-5%, potentially impacting the upcoming increment cycle, experts said. To be sure, although the four labour codes have been passed, key rules, especially those on wage definition, accounting treatment of past service costs, provident fund, gratuity, leave encashment, and overtime are still under public consultation, with several states yet to notify their own rules.
Since labour is a subject under the Concurrent List, companies are waiting for clarity from both the Centre and states before restructuring salaries. Companies are also yet to begin informing staff on new salary structures since the rules under the new labour codes are still under public consultation.
Industry bodies, including the Confederation of Indian Industry (CII) have sought multiple clarifications, particularly on the accounting treatment of wage restructuring and employee benefit liabilities. According to estimates by brokerage firm Jefferies, a 2% rise in employee costs could shave off 2-4% from FY27 earnings for IT companies.
“The annual wage bill is likely to increase by approximately 3-5% on a recurring basis once the new structures are fully embedded,” said Deepti Thakkar, lead - employment and HR laws practice at law firm Nishith Desai Associates. “Given the calculation based on the revised definition of wages, the wage base is likely to double for many employees, with analysts estimating an approximately 25- 50% jump in gratuity reserves for companies,” she said.
The basic component is likely to double for many employees, also causing an increase in payouts for provident funds (PF). This means takehome salaries could also see a sharp dip, especially at senior levels, and could be between Rs 15,000- 35,000 per month due to higher taxes and PF cuts, depending on allowances and structuring, she explained.
“However, this outcome is not universal and will depend on how PF is applied (e.g., actual basic vs. capped at Rs 15,000) and on the existing compensation structure of the employer,” she said. Kamal Karanth, cofounder of specialist staffing firm Xpheno said IT firms have started making provisions for the higher costs and will have to change their salary structures for implementing the new labour codes.
