India's four new labour codes, effective November 21, 2025, have introduced a uniform definition of "wages" that is forcing IT companies to fundamentally redesign their compensation structures.
For IT firms that historically kept basic pay at 25-40% of CTC to minimize statutory obligations, this isn't just a compliance exercise—it's a complete overhaul of their compensation philosophy.
Tata Consultancy Services exemplifies the industry-wide challenge. The company implemented a revised compensation structure effective April 1, 2026, designed around three principles: compliance with new labour codes, standardization of wage structures across its India workforce, and protection of employee take-home salaries while retaining tax efficiency flexibility. However, the execution has sparked significant employee confusion and concern.
The mathematics behind the restructuring is straightforward but painful. When basic pay increases from 35% to 50% of CTC to meet compliance requirements, statutory-linked costs rise proportionally. Provident Fund (PF) contributions, calculated at 12% of wages, increase immediately. For an employee with ₹10 lakh CTC, basic pay jumps from ₹3.5 lakh to ₹5 lakh, increasing annual PF contributions from ₹42,000 to ₹60,000. That's ₹18,000 more flowing into retirement savings rather than monthly take-home pay.
The impact on gratuity is even more dramatic. Gratuity is calculated using the formula: (Last Drawn Wages × 15 × Completed Years of Service) ÷ 26. Under the old structure with 35% basic pay, a 10-year employee with ₹10 lakh CTC would receive approximately ₹16.8 lakh. Under the new 50% wage base, this jumps to ₹24 lakh—a 43% increase. For IT companies with large workforces, this represents a substantial long-term liability that must be provisioned for immediately.
The financial hit has been visible across the sector. TCS booked a one-time provision of ₹2,128 crore in Q3 FY26 (₹1,800 crore for gratuity, ₹300 crore for leave liability).
While management teams emphasize that ongoing impact will be limited to 10-20 basis points on margins, the immediate cash flow impact on employees is real. Transcripts
Nearly 28% of companies are shifting to quarterly variable payout cycles, up from monthly or annual distributions. Variable pay now accounts for an average 16.1% of fixed compensation, up from 14.8% in 2024. While this improves working capital for employers, it creates cash flow volatility for employees.
Consider an employee with ₹50,000 monthly fixed salary and ₹24,000 quarterly variable pay. Under the old monthly system, they received roughly ₹58,000 monthly. Under quarterly cycles, they receive ₹50,000 for two months and ₹74,000 in the third month. The annual total is identical, but monthly cash flow becomes unpredictable. For employees with EMIs, rent, and other fixed obligations, this volatility feels like a pay cut even when total compensation hasn't changed.
While this signals recovery, the quarterly timing means employees must wait longer for performance rewards, exacerbating monthly cash flow pressure.
The IT sector is implementing sharper performance-based pay differentiation. According to Aon, top performers receive bonus payouts and merit increases that are 1.6x to 1.8x higher than average performers. EY reports that top talent earns 120-150% of target variable payouts, compared to 60-80% for average performers.
This creates a widening gap. Top performers in the A+ category at TCS received hikes between 9% and 12%, while A category employees received 5-8%. Mid- and lower-rated employees received minimal increases. When combined with higher statutory deductions and quarterly variable pay deferral, these employees effectively see stagnant or declining take-home pay despite receiving appraisal letters.
The pressure is particularly acute because the technology consulting and services sector has the lowest projected salary increases for 2026 at 6.6%, compared to India Inc's average of 9.1%. With employee costs already accounting for 60% of IT company budgets, there's limited room for generous fixed pay increases in a weak demand environment.
The most visible source of employee confusion is the removal of gratuity from displayed CTC structures. TCS and other firms have excluded gratuity from the CTC figure shown in appraisal letters, creating the appearance of a salary reduction. Employees comparing old and new CTC figures see a lower number and assume their compensation has been cut.
In reality, gratuity accruals have actually increased under the revised framework because calculations are now linked to broader wage definitions rather than only basic salary. TCS maintains that employees should remove gratuity from previous CTC calculations to make a "like-for-like" comparison. But this nuance is lost on employees who see a lower headline number and worry about its impact on future job negotiations.
Allowances like HRA, personal allowance, and special allowance are being recalibrated or reclassified to fit new wage definitions. The result is a CTC that looks structurally different on paper—higher basic pay, higher statutory deductions, and sometimes a lower visible annual number. Employees focus on the immediate reduction in take-home pay rather than the long-term increase in retirement benefits.
TCS faces an unprecedented challenge in explaining these changes to nearly 600,000 employees. The labour codes came with a tight deadline and were implemented retrospectively from November 21, 2025. "TCS has just released its increments, but to reach nearly 600,000 employees with proper explanation of the CTC structure will take some time. The Labour Codes came with a tight deadline and it was implemented retrospectively," says R Swaminathan, former CHRO of WNS.
The complexity is compounded by the need to balance multiple objectives: compliance, standardization, take-home protection, and tax efficiency. Different employees prioritize different objectives, and no single narrative addresses all concerns equally. While TCS has deployed AI assistants to provide instant multilingual HR policy support, technology cannot address the emotional and financial anxiety that accompanies perceived salary cuts. Transcripts
Underlying the compensation restructuring is a broader strategic imperative. IT firms are navigating weak global discretionary tech spending, AI-led productivity shifts, and mounting cost pressures. Salary restructuring is being used as a lever to optimize costs while maintaining competitiveness for critical talent.
Nearly 45-50% of organizations are shifting to skill-based pay frameworks, with emerging tech roles commanding up to 40% skill premiums. This allows companies to concentrate compensation spend on high-value roles while reducing investment in commoditized skills. The shift from role-based to skills-based compensation represents a fundamental transformation in how IT companies think about talent investment.
The combination of moderate fixed pay hikes, variable pay restructuring, and performance differentiation creates what employees perceive as hidden salary cuts. But from a corporate perspective, this is a necessary adaptation to a changing market. The outcome is a compensation structure that is more performance-linked, variable, and increasingly complex to compare at face value.
For employees, the message is clear: understanding your compensation now requires looking beyond the headline CTC figure. The real value lies in the combination of fixed pay, variable pay, statutory benefits, and long-term incentives. Companies that communicate this effectively will retain trust and engagement. Those that don't risk losing talent to competitors who can navigate the new compensation landscape more transparently.
