New labour codes unlikely to hit salary hikes, but IT sector may see softer increments

A majority of companies are unlikely to temper salary hikes because of higher wage bills from the implementation of new labour codes, but increments may get impacted in some select sectors like information technology, said HR heads and compensation experts. Costs of benefits such as gratuity, overtime, bonus and leave encashment have increased after the new labour codes took effect in November 2025, as these will be calculated using the new wage definition. Many companies, especially from the IT sector that have large workforce, posted significantly lower profits in the past quarter due to one-time provisions and costs related to the code implementation. Wage growth is driven more by labour demand, skills and productivity than compliance expenses, said the people ET spoke with. In a competitive market, lowering pay risks higher attrition, which can be more expensive.

However, margin-sensitive sectors, including IT services and parts of the non-banking financing segment, may see a softer salary increase, they said.

Organisations are taking different approaches to funding the impact of new labour codes, said Amit Otwani, associate partner, Talent Solutions-India at Aon. Some are carving out a separate budget for these costs, while others are absorbing them within the overall salary pool. Aon has projected salary increments of around 9% for 2026.

“Many organisations had anticipated that such costs would eventually rise. As a result, they had already factored in the need for a separate buffer, even if they did not know when it would be triggered,” he said.

Rajkamal Vempati, head of HR at Axis Bank, said the slight moderation in salary increments is likely to be selective rather than broad-based. “Companies are expected to protect pay-outs for high performers and business-critical roles, where talent remains scarce. In-demand and specialised skills will continue to command premiums, even as overall increment cycles turn more cautious,” Vempati said.

Transition to take time
Companies will not penalise employees just because there is a rejig; on the contrary, it will benefit employees, said Rajorshi Ganguli, president and global HR head at Alkem Laboratories.

Once the finer details of the labour codes are analysed, companies will revisit compensation structures and recalibrate where necessary. This transition may take 2-3 months for the changes to stabilise, Ganguli added.

Cost of labour codes implementation should not be directly related to pay hikes, said Arvind Usretay, head of Human Capital Consulting-Asia at Lockton. “These need to be in line with the market and talent requirements of employers. Muted increments can impact employee engagement.”

The ongoing problem with labour codes is that there are still several moving parts, and I anticipate issues with wide-ranging ‘interpretation’ of various requirements by employers, Usretay added.

However, margin-sensitive sectors such as IT services and parts of the NBFC space may see a downward bias in salary hike going forward, according to Anustup Chattopadhyay, associate partner, Talent Solutions-India, Aon.

This is because organisations where employee costs account for a large share of total revenue and operating expenses are less likely to stretch their compensation budgets beyond a point. “Any additional liability only adds to the pressure. In such cases, even standard pay increases of 8-9% can become challenging, especially for companies operating on thin margins,” Chattopadhyay added.

Labour codes are likely to trigger a broader rethink of workforce planning, including headcount mix, outsourcing, automation and the role of artificial intelligence. “This is not a short-term accounting adjustment. It is a long-term reset of how organisations think about compensation, talent and cost structures,” Otwani added.