Statutory impact of new labour codes, AI-led restructuring costs and a large legal provision weighed on TCS’s Q3 FY26 profitability
Under the new Codes, wages now include basic pay, dearness allowance, and retaining allowance
Tata Consultancy Services (TCS), India’s largest information technology (IT) services firm, saw its profit impacted due to restructuring and changes in labour codes.
For the third quarter of 2025-26 (Q3FY26), TCS stated, the statutory impact of the new labour codes was ₹2,128 crore. “The incremental impact consisting of gratuity of ₹1,816 crore and long-term compensated absences of ₹312 crore primarily arose due to change in wage definition,” the company said.
Meanwhile, restructuring efforts of the company, as it laid off employees to become an artificial intelligence (AI)-first firm, also impacted its bottom line. The restructuring expenses for the nine months ending December 31, 2025 came at ₹1,388 crore.
“In July 2025, the group announced restructuring initiatives. As a part of this initiative, the group released/will release certain associates from the organisation whose deployment may not be feasible. Termination benefits have been provided as per policy devised for this purpose,” said the company.
For Q3FY26, the restructuring expense stood at ₹253 crore, and for Q2FY26 the expense was ₹1,135 crore.
Under the new labour codes, wages now include basic pay, dearness allowance, and retaining allowance.
If the share of allowances, including house rent allowance and conveyance allowance, exceeds 50 per cent of total remuneration, the labour code now mandates that the excess amount will be added to the wage. This is done to ensure that at least 50 per cent of the remuneration is counted as “wages”, which helps increase social security contributions for workers.
TCS’ Chief HR Officer Sudeep Kunnumal said: “Our associates are at the heart of our transformation into an AI-first enterprise. As of this quarter, there are over 217,000 associates with advanced AI skills, directly powering client success at scale. We doubled our intake of fresh graduates with higher order skills, rapidly expanding our next-generation talent pool. The passion and commitment our associates show in mastering next-gen capabilities gives us the confidence to innovate responsibly, and deliver sustainable value as AI reshapes the services landscape.”
Other than the employee cost, TCS also had to make a provision of ₹1,010 crore towards legal claim. The legal claim is for a case with the Computer Sciences Corporation (CSC), which had filed a legal claim against TCS in April 2019.
The company, based on consultations with external lawyers and legal assessment, believes that it has a strong case and would defend its position vigorously, and pursue legal remedies to overturn the decision of the Fifth Circuit.
“Considering all the facts and various legal precedence, on a conservative and prudent basis, the company provided $112 million (₹1,010 crore) towards this legal claim in the consolidated interim statement of profit and loss for period ended December 31, 2025 as provision towards legal claim under exceptional items. In addition, the company has also provided $38 million (₹342 crore) towards pre- and post-judgement interest until expected date of settlement of this liability and disclosed it under other interest costs,” the company said.
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