Budget 2026-27: Cloud Giants Applaud 21-Year Tax Holiday for India Data Centres
The Union Budget 2026-27 has introduced a groundbreaking proposal that has global cloud providers celebrating. Finance Minister Nirmala Sitharaman announced a substantial 21-year tax holiday for foreign companies establishing data centres in India, specifically targeting those offering cloud services to international customers through Indian infrastructure.
Strategic Move to Boost Digital Infrastructure
Presenting the budget in Parliament on February 1, 2026, Sitharaman emphasized the government's recognition of digital infrastructure as strategic national infrastructure. The tax exemption, valid until March 31, 2047, is designed to attract significant foreign investment while positioning India as a global cloud hub.
The proposal comes with specific conditions that foreign cloud providers must meet to qualify:
- Data centre services to Indian customers must be routed through an Indian reseller entity
- Foreign companies cannot own or operate the physical infrastructure of specified data centres
- Related entities must adhere to safe harbour rules with margins up to 15% over cost
Industry Leaders Welcome the Initiative
Major technology companies have expressed strong support for the proposal. Puneet Chandok, President of Microsoft India & South Asia, called it a significant move that provides long-term policy certainty. He noted that Microsoft's expansion plans in India align perfectly with this direction, including investments in hyperscale cloud and AI infrastructure.
Arundhati Bhattacharya, President & CEO of Salesforce South Asia, described the tax holiday as a masterstroke in data sovereignty, predicting it could attract approximately $50 billion in data centre investments by 2030. However, she cautioned about the need for increased R&D investment to ensure India becomes an AI innovator rather than just a sophisticated consumer.
India's Data Centre Market Poised for Explosive Growth
According to global real estate advisory JLL, India's data centre market is on the verge of explosive growth. Currently, India accounts for only 3% of global data centres, with 70% located in high-income countries. The market is projected to grow substantially:
- Total capacity is expected to surpass 2 GW by 2026, up from just over 1 GW currently
- By 2030, capacity could exceed 8 GW
- Capital investments are estimated to reach over $30 billion
Major players including Google, Microsoft, Amazon Web Services, Meta, and Reliance Industries are already investing billions in this sector.
Impact on AI Development and Smaller Businesses
The tax holiday proposal has significant implications for artificial intelligence development in India. Data centres provide the essential computing capacity needed to build large AI systems, making them fundamental to the AI industry's growth.
Industry body Nasscom welcomed the proposal, stating it sends a clear signal to attract long-term global investment and supports the expansion of India's compute capacity. The organization particularly praised the 15% safe harbour provision for providing pricing certainty.
However, some experts have raised concerns about the policy's impact on smaller domestic players. Sagar Vishnoi, Director and Co-Founder of Future Shift Labs, noted that because services to Indian users must be routed through Indian resellers, smaller companies might end up competing for reseller margins rather than receiving comparable upstream incentives.
Environmental Considerations and Future Outlook
While the tax holiday promises to accelerate India's digital economy, experts have flagged potential environmental challenges. Data centres consume massive quantities of electricity and water resources, and their rapid expansion could strain India's infrastructure.
The Finance Bill 2026 proposes amendments to Schedule IV of the Income-tax Act, 1961, to implement these changes. A 'specified data centre' is defined as one set up under an approved scheme, notified by the Ministry of Electronics and Information Technology, and owned and operated by an Indian company.
These amendments will take effect from April 1, 2026, marking a significant step in India's journey toward becoming a global data centre hub while balancing economic growth with environmental sustainability.
