The Budget 2026 data center tax break has been welcomed by global cloud giants and hyperscale’s, as the Finance Ministry proposed tax relief till 2047 for foreign companies setting up data centers in India. Big tech businesses and cloud hyperscale’s praised the Finance Ministry’s Budget 2026-27 proposal to grant a tax break till 2047 for any foreign company intending to establish data centers in India, as long as they meet certain criteria.The Budget 2026 data center tax break is expected to reshape India’s cloud infrastructure ecosystem.
Finance Minister Nirmala Sitharaman presented the Union Budget 2026-27 in Parliament on Sunday, February 1, saying, “Recognizing the need to enable critical infrastructure and boost investment in data centres, I propose to provide a tax holiday to any foreign company that provides cloud services to customers globally by using data center services from India until 2047.”
One of the requirements for international cloud providers to qualify for the multi-year tax holiday is that data center services to Indian consumers be routed through an Indian reseller firm. If the company providing data center services from India is a linked entity, safe harbour regulations allow for a margin of up to 15% above cost.
Section 92CB of the Income Tax Act of 1961 defines safe harbour rules for determining arm’s length price under sections 92C or 92CA. Safe harbour refers to situations in which the income-tax authorities accept the transfer price declared by the assessee. Transfer Price refers to the real price charged in a transaction between linked firms within the same multinational enterprise (MNE) group.
Aside from algorithmic innovation and training data sets, one of the most important components for building large AI systems is processing capability, which is often provided by data centers. As a result, data centres spanning acres of land have become the foundation of the AI business. These facilities power millions of computers outfitted with powerful chips while consuming vast amounts of resources like electricity and water.
According to experts, the government’s proposed tax break might have a multiplier impact on the digital economy, since local data centers would allow overseas tech companies to fulfill the country’s growing AI need while also allowing them to serve worldwide markets from India.
Increasing India’s domestic data center capacity may help reduce the cost for smaller enterprises to access the compute required to train and create such AI systems. However, the rapid expansion of data centres in India may strain the country’s resources and have a severe influence on the environment.
Microsoft and Salesforce discuss a tax holiday idea
According to Puneet Chandok, President of Microsoft India & South Asia, the proposed tax break is a significant step towards recognizing digital infrastructure as essential national infrastructure. As AI use grows, secure and robust compute capacity will support public services, enterprise innovation, and long-term competitiveness.
“Microsoft’s commitments in India closely fit with this direction. We are extending hyperscale cloud and AI infrastructure, especially into new regions, while also investing in skilling at scale,” Chandok said.
Budget 2026 Data Center Tax Break: Key Conditions Explained
Arundhati Bhattacharya, President & CEO of Salesforce South Asia, stated, “The tax holiday for cloud services until 2047 is a masterstroke in data sovereignty, attracting an estimated $50 billion in data center investments by 2030 while positioning India as the cloud hub for emerging markets.” Bhattacharya also identified a key shortfall in R&D spending, saying that it could lead to India becoming smart AI consumers rather than technological innovators.
India’s data centre market
According to global real estate adviser JLL, global companies such as Google, Microsoft, Amazon Web Services, and Meta, as well as local firms such as Reliance Industries, are investing billions of dollars in India’s data center sector, which is primed for “explosive growth”.
According to World Bank figures given in the Economic Survey 2026-27, India currently accounts for only 3% of global data centres, with 70% located in high-income countries. By 2026, India’s data center capacity is expected to exceed 2 GW, up from little over 1 GW currently. Capital investments of over $30 billion are expected to propel growth to over 8 GW by 2030, according to various estimations.
What the Finance Bill for 2026 says ?
The Finance Bill, 2026, proposes retroactively amending Schedule IV of the Income-tax Act, 1961, to exempt a foreign company’s income accruing or arising in India as a result of contracting data center services from a specified data center for a period up to the tax year ending March 31, 2047.
According to the Bill, a’specified data centre’ is “a data centre set up under an approved scheme and notified in this behalf by the Central Government in the Ministry of Electronics and Information Technology; and is owned and operated by an Indian company.”
Data center amenities are defined as “services provided by a data centre through the use of physical infrastructure including land, buildings, mechanical electrical power equipment’s, cooling system, security and information technology infrastructure including servers, computers, storage systems, operating systems, security solutions, network and associated software platforms, networking and other equipment, human resource in India.”
According to the Bill, one of the prerequisites for exemption is that services provided by a foreign corporation to Indian users must be channeled through an Indian reseller. To be eligible for the tax exemption, the foreign firm must not own or operate any of the specified data centre’s physical infrastructure or resources. These revisions will take effect on April 1, 2026.
Impact on smaller cloud providers
According to industry association Nasscom, the planned tax break for data centres “sends a clear signal to attract long-term global investment and support the expansion of India’s compute capacity”. It further stated that the 15% on-cost safe harbor concept provides pricing certainty for typical infrastructure services.
“On a broad reading, the combined design of these measures helps address long-standing interpretational challenges by clearly separating cloud service activity from data centre operations and aligning India’s taxing rights with arm’s length remuneration, thereby improving ease of doing business and investment confidence,” the announcement said.
While the government’s intention to drive the larger AI ecosystem is clear, the regulatory design minimizes direct, large-scale incentives for local deep-tech startups and founders, according to Sagar Vishnoi, Director and Co-Founder of Future Shift Labs. “Because services to Indian users must be routed through an Indian reseller entity, smaller domestic players may end up competing for reseller margins rather than receiving comparable upstream incentives themselves,” said Mr. Singh.
Experts believe the Budget 2026 data center tax break will attract long-term investment from global hyperscalers.Experts believe the Budget 2026 data center tax break will attract long-term investment from global hyperscalers.Experts believe the Budget 2026 data center tax break will attract long-term investment from global hyperscalers.Experts believe the Budget 2026 data center tax break will attract long-term investment from global hyperscalers.Experts believe the Budget 2026 data center tax break will attract long-term investment from global hyperscalers.
About The Author
