India’s new labour codes, effective since November 2025, have significantly raised corporate wage costs, forcing companies to reassess compensation budgets. While most sectors are unlikely to cut salary hikes, IT services firms may see softer increments, as rising statutory expenses begin compressing operating margins.
This matters because IT stocks dominate Nifty earnings weight, and persistent margin pressure now raises the probability of earnings downgrades, a key factor markets closely track during result seasons.
What Happened—Key Facts
According to experts:
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Gratuity, overtime, bonus, and leave encashment costs have increased due to the new wage definition under labour codes.
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Companies, especially IT firms with large workforces, recorded significantly lower profits in the December 2025 quarter, largely due to one-time provisions and compliance costs.
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Average salary increments for 2026 are projected at ~9%, but margin-sensitive sectors like IT services and NBFCs may see softer hikes.
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Companies are either creating separate buffers or absorbing costs within salary pools to manage the impact.
Market Reaction & Sector Signal
While benchmark indices remained range-bound, IT stocks have underperformed broader markets in recent sessions, as investors factor in margin compression risks.
Brokerage commentary and earnings data indicate:
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One-time labour code provisions shaved 10–20% off Q3FY26 profits for select IT majors.
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Recurring employee expenses could rise by up to 5%, structurally resetting IT margin expectations.
This explains why Nifty IT has struggled to sustain breakouts, despite stable global tech cues.
Non-Obvious Insight—What Most Headlines Miss
Despite higher wage bills, most companies are choosing not to slash salary hikes, not out of generosity, but to prevent costly talent attrition.
Interpretation:
In a tight labour market, retention risk > regulatory cost risk.
However, IT services face a structural bind:
High employee cost + pricing pressure + weak global tech spending = limited room to absorb rising statutory expenses.
This makes IT the weakest link in the labour code transition, not manufacturing, not BFSI.
That explains why IT earnings downgrades are rising, even as broader corporate India stays resilient.
Sentiment Signal—What This Reveals About Market Psychology
Markets are no longer rewarding IT stocks for revenue growth alone.
Instead, margin sustainability has become the dominant valuation trigger.
The repeated failure of IT stocks to hold rallies suggests investors are pricing in a prolonged cost reset cycle, not just a one-quarter impact.
This sentiment shift lowers risk appetite toward IT, even during global tech rebounds.
What Traders Should Watch Next
Key Levels (Nifty IT):
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Support: 35,800–36,000
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Resistance: 37,400–37,700
Triggers Ahead:
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Q4 FY26 earnings guidance from large IT firms
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Management commentary on recurring labour cost absorption
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Client pricing environment & deal wins
Risk Factor:
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If margin pressure persists, earnings downgrades and valuation de-rating risk
Probability Shift:
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Rising likelihood of sector rotation away from IT into BFSI, infra, PSU & manufacturing
Conclusion
While India Inc. appears well-placed to absorb higher statutory costs, IT services stand at a structural inflection point.
If labour code-linked expenses continue to suppress margins, IT stocks could underperform broader markets through FY26, pushing traders to stay selective, not broadly bullish, within the sector.
Markets will now watch Q4 margin guidance closely because that’s where the next major trend will be decided.
FAQs
Q1. Will new labour codes reduce salary hikes in India?
No, most companies will maintain salary hikes, but IT services may see softer increments due to margin pressure.
Q2. Why is IT sector most impacted by labour codes?
IT firms have large workforces, making them more sensitive to higher gratuity, PF and statutory costs.
Q3. How will labour codes impact IT stock prices?
Sustained margin pressure could lead to earnings downgrades, capping IT stock upside in FY26.
