Artificial intelligence is helping India’s largest IT services companies automate software development, improve productivity and deliver projects faster. However, these efficiency gains have not yet translated into lower employee expenses. Instead, companies including Tata Consultancy Services (TCS), Infosys, HCLTech, Wipro, Tech Mahindra and LTM (formerly LTIMindtree) are facing rising workforce costs as they compete for specialised AI talent, invest in employee reskilling and adjust compensation.
Employee benefit expenses at most of these companies increased by around 9–10% during the first half of FY27 compared with the corresponding period last year, according to their September-quarter financial results. Tech Mahindra reported a lower increase of approximately 6.5%. The pressure could continue in the second half of the financial year as annual salary revisions, selective recruitment and the growing demand for premium technology skills affect operating costs. The trend highlights a central challenge for India’s IT industry: AI is changing how companies deliver services, but it is not yet making their workforce cheaper.
Employee Costs Continue to Rise Despite AI Adoption
India’s IT services industry has traditionally depended on a large workforce of software engineers, developers, testers, consultants and support professionals. Employee expenses therefore account for a substantial share of operating costs.
AI is beginning to change this model by automating repetitive coding, software testing, documentation, customer support and maintenance activities. In theory, companies should be able to complete more work with fewer employees, improving productivity and reducing labour costs.
However, the financial results of leading IT companies show that the transition is more complicated.
| Company | Employee cost trend in H1 FY27 |
|---|---|
| TCS | Up 10.1% |
| Infosys | Around 9–10% |
| HCLTech | Around 9–10% |
| Wipro | Around 9–10% |
| LTM | Around 9–10% |
| Tech Mahindra | Up 6.5% |
The figures reflect reported employee benefit expense growth compared with the year-ago period, as reported in the September-quarter results and industry coverage. They should not be interpreted as individual salary increases because total employee expenses also depend on workforce size, hiring patterns, bonuses and employee composition.
The increase demonstrates that AI productivity gains have not yet reduced the industry’s overall workforce spending.
Why AI Is Not Reducing Employee Expenses
1. Demand for AI Specialists Is Increasing
The biggest reason is the changing composition of the IT workforce.
Companies are reducing their dependence on some repetitive and routine technology roles while hiring professionals with specialised skills in artificial intelligence, cloud computing, data engineering, cybersecurity and advanced software development.
These skills are often more expensive than traditional entry-level technology roles.
IT companies must compete with global technology businesses, AI startups and consulting firms for experienced professionals who can build, deploy and manage enterprise AI systems.
As a result, savings from automating certain activities can be offset by higher compensation for specialised employees.
2. Reskilling Existing Employees Costs Money
AI adoption does not mean companies can immediately replace their existing workforce.
Large IT services providers employ hundreds of thousands of people working across different technologies and client projects. Many employees need training before they can work effectively with generative AI tools and automation platforms.
Companies are investing in internal training programmes, certifications and technical development to prepare employees for new assignments.
Reskilling is essential because clients increasingly expect technology providers to combine traditional IT expertise with AI implementation capabilities.
However, these programmes require investment in training infrastructure, instructors, learning platforms and employee time.
3. Annual Salary Revisions Continue
Even as companies become more selective about recruitment, they still need to retain experienced employees.
Annual compensation reviews, performance-linked payments and targeted salary increases contribute to workforce expenses.
Several IT companies have already factored the impact of wage revisions into their financial expectations for the second half of FY27.
Infosys, HCLTech, Wipro and Tech Mahindra executives have indicated that salary-related costs will influence expenses in the coming quarters.
This creates a situation in which companies may be reducing hiring in some departments while spending more to retain employees with critical skills.
4. New Labour Codes Could Add to Costs
Changes associated with India’s labour codes are another factor companies are monitoring.
The new labour framework could affect how employee wages, allowances and statutory benefits are calculated. Depending on an organisation’s existing compensation structure, changes in the definition of wages may increase certain statutory benefit obligations.
The financial impact will differ across companies because their employee structures and salary components are not identical.
For large IT services providers, even relatively small changes in employee-related obligations can affect overall operating expenses.
TCS Shows How Employee Expenses Can Fluctuate
TCS, India’s largest IT services company, reported a 10.1% increase in employee expenses during the first half of FY27 compared with the same period last year.
However, its employee costs declined 0.6% between the first and second quarters, even as its headcount increased.
TCS Chief Financial Officer Samir Seksaria attributed the sequential movement partly to lower performance-linked bonus outlays, reflecting the company’s performance against internal targets.
This illustrates why employee expenses cannot be understood simply by looking at headcount.
A company’s total workforce spending depends on several variables, including:
- Number of employees.
- Average compensation.
- Hiring and employee exits.
- Distribution of employees across countries.
- Mix of junior and senior professionals.
- Performance-linked bonuses.
- Statutory benefits and other employment costs.
A company can increase its employee count while reducing quarterly expenses if bonuses or other compensation components decline. Similarly, a company can reduce headcount but still report higher employee costs if it hires more expensive specialists or increases compensation for existing employees.
AI Productivity Gains Are Also Being Passed to Clients
Another reason automation has not immediately improved profitability is that customers increasingly expect IT companies to share the savings generated by AI.
Traditionally, many IT services contracts were linked to the number of employees deployed, hours worked or resources assigned to a project.
AI is changing this arrangement. Clients want projects completed faster and at lower costs, rather than paying the same amount for fewer hours of human work.
This is putting pressure on service providers to offer more competitive pricing.
A Reuters report in August 2026 highlighted how large enterprise customers are increasingly demanding measurable productivity improvements and linking payments to business outcomes rather than employee deployment.
Some clients have sought price reductions of 25–30% on new contracts, according to industry executives and analysts cited in the report.
Consequently, IT companies may become more productive without retaining all the financial benefits. A portion of the savings is passed to customers through lower contract prices.
This limits how quickly AI-driven efficiency can improve revenue per employee and operating margins.
AI Revenue Is Growing, but Productivity Benefits Remain Uneven
Indian IT companies are reporting stronger demand for AI-related services, but this does not automatically mean that their overall business becomes more profitable.
Moneycontrol reported in October 2026 that revenue per employee across major Indian IT services companies had remained largely flat over five quarters, despite growing AI adoption.
The report also highlighted that AI-related revenue still represents a relatively small share of total revenue for several providers. Some of the new AI business comes from transforming existing client engagements rather than generating entirely new spending.
The distinction matters because companies can report strong growth in AI services while simultaneously facing weaker demand or lower pricing in traditional software development, testing and maintenance.
For AI to become a meaningful financial advantage, service providers need to convert productivity improvements into additional business, higher-value offerings and better margins.
The Bigger Picture
The pressure on employee expenses reflects a structural transition in India’s IT services industry.
For decades, the sector’s business model relied heavily on hiring large numbers of engineers and deploying them across international client projects. AI is challenging that model by automating activities that previously required substantial human involvement.
However, the transition is not simply about replacing employees with software. Companies need expensive specialists to build AI systems, train existing employees, maintain enterprise platforms and ensure that automated processes work reliably.
At the same time, customers want to capture a share of the productivity improvements through lower prices. This creates pressure from both sides: technology companies must spend more on specialised talent while potentially earning less for certain traditional services.
The companies that succeed will need to build higher-value AI businesses while managing the cost of transforming their existing workforce.
Looking Ahead
Employee expenses are likely to remain an important factor in the financial performance of Indian IT services companies during the second half of FY27. Salary revisions, specialised recruitment, reskilling programmes and changes in workforce composition will influence spending. Investors will also watch whether companies can convert AI-related productivity into stronger operating margins rather than passing most of the savings to customers.
Over the longer term, AI could reduce the industry’s dependence on traditional labour-intensive delivery models, but the financial benefits will not appear uniformly across companies. Providers that develop valuable AI services, improve employee productivity and negotiate contracts that reward business outcomes could capture more of the gains. Until that transition becomes visible in financial results, rising talent costs and pricing pressure will remain major challenges for India’s IT sector.
Get the day’s top stories in your inbox
One concise email. No spam, unsubscribe anytime.
