The Union Budget 2026 has introduced a landmark tax holiday for foreign cloud service providers operating through data centers in India, extending until 2047. Union Finance Minister Nirmala Sitharaman highlighted that foreign firms offering cloud services to global clients via Indian-based infrastructure would be eligible for the tax benefit, provided that services offered to domestic customers are routed through an Indian reseller entity.
This initiative aims to position India as a premier global hub for digital infrastructure, fostering the growth of local data storage and processing capabilities. Complementing this, the government has announced measures to strengthen the IT services sector, including raising the safe harbour threshold for IT services to ₹2,000 crore, implementing an automatic approval mechanism without officer intervention, and standardizing a 15.5% safe harbour margin across all IT services.
Implications for the Technology and Data Centre Sector
The tax incentive is expected to significantly boost India’s technology and data centre industry. By exempting profits earned from cloud services delivered from Indian facilities, the measure could drive substantial investment in data centre infrastructure, particularly in emerging technology hubs. Industry experts suggest that the incentive will encourage global technology firms, capability centres, and cloud operators to establish or expand local data centres, generating employment and stimulating economic growth. Shashank Karincheti, Co-founder & CPO of Redacto.ai, called the data center tax holiday a “watershed moment for India’s digital economy.” Incentives for foreign cloud providers and a 15% safe harbour for related-party services remove DPDP Act hurdles. Onshore data processing enables enforceable consent, actionable data principal rights, and easier cross-border transfers. He cautioned that localization alone ≠ privacy—robust consent management, third-party risk governance, and accountability are essential for true compliance and DPDP readiness.
Data centres, which underpin critical services such as online banking, e-commerce, streaming platforms, and AI applications, have witnessed rapid expansion in India, fueled by rising demand for cloud computing and digital services. The government’s initiative will not only address the surging domestic demand for AI and digital solutions but also enable Indian-based centres to serve international markets. Amit Kumar Tyagi, CEO of TrueReach AI, described the Union Budget 2026 as a “clarion call for the ‘Intelligence-First’ era.” The combination of a tax holiday for cloud services using Indian data centers and the ₹10,300 crore IndiaAI Mission to provide subsidized compute removes cost barriers for high-end innovation. With the government targeting a 10% share of global services by 2047, we are no longer just an outsourcing hub; we are becoming an ‘AI Factory’ hub. He added that the focus on Sovereign LMMs and the 38,000-GPU strong compute base ensures Indian startups can now build production-grade, autonomous software 10x faster, bringing ‘Made in India’ intelligence to the global stage at unprecedented scale.
Opportunities and Challenges
Enhancing India’s domestic data centre capacity could reduce operational costs for smaller firms seeking computational resources for AI and other digital applications, potentially democratizing access to advanced technologies. However, experts caution that the accelerated growth of data centres may place pressure on the country’s natural resources and environment, highlighting the need for sustainable infrastructure planning. Manoj Dhanda, Co-Founder and CEO of UTHO Cloud, described the budget as a “strong positive indication” for India’s cloud and digital infrastructure ecosystem. He highlighted the long-term tax holiday proposed for global cloud service providers using Indian data centers, set to run until 2047. This will significantly boost investments while strengthening data localization and establishing India as a worldwide cloud computing hub,” Dhanda explained. He also noted the government’s commitment to building an independent digital economy through the expansion of the India Semiconductor Mission into ISM 2.0 and the establishment of the Rs 10,000 crore SME Growth Fund, initiatives designed to fuel innovation and entrepreneurship.
Overall, the Budget 2026 measures signal India’s commitment to strengthening its digital ecosystem, attracting foreign investment, and establishing a long-term competitive advantage in the global cloud and IT services market. Budget 2026 clearly positions India as a global hub for cloud and data services. Long-term tax certainty, a practical safe-harbour framework, and the requirement for local reseller participation make India far more attractive for global business. For the BPM sector, this strengthens our ability to scale delivery from India, expand beyond metros, and bring global work closer to skilled local talent said Abhinav Arora, CEO & MD, EOSGlobe. Long-term tax certainty, a practical safe-harbour framework, and the requirement for local reseller participation make India far more attractive for global business. Abhinav Arora, CEO & MD of EOSGlobe, underscored how the budget strengthens India’s position as a global cloud and data services hub. For the BPM sector, this strengthens our ability to scale delivery from India, expand beyond metros, and bring global work closer to skilled local talent,” Arora noted.
