New Delhi— India announced a landmark 21-year tax holiday on Sunday for foreign companies operating data centres in the country, aiming to attract global tech giants and secure its position in the booming artificial intelligence infrastructure race.
Finance Minister Nirmala Sitharaman unveiled the policy during the 2026 union budget presentation, offering zero taxes through 2047 on revenues from cloud services sold outside India if those services run from Indian data centres.
The government simultaneously introduced a 15 percent safe harbour mechanism with a Rs 2,000 crore revenue threshold to reduce litigation risks for Indian data centre operators providing services to foreign parent companies.
Key Facts
• India's data centre capacity reached 1.5 gigawatts by end of 2025 across seven major cities, projected to hit 1.7 GW by end of 2026
• The tax holiday extends until 2047, providing a two-decade window for foreign cloud providers like Google, Microsoft, and Amazon to establish operations without profit taxation on global revenues
• India generates approximately 20 percent of the world's data but lacks adequate storage infrastructure, with 95 percent of Indian data currently processed or stored abroad
The announcement signals India's aggressive push to become a regional data and compute hub, particularly as demand for AI infrastructure surges globally. Data centres require massive capital investment, electricity, water, and land—resources India can provide at significantly lower costs than Western nations and China.
This tax incentive removes a major barrier that has historically discouraged foreign investment in India's data centre sector.
Global technology corporations have already signalled strong interest in India's data centre opportunity.
Amazon, Google, and Microsoft collectively control 63 percent of the global cloud infrastructure market and have announced over $30 billion in planned investments over 14 years to expand AI and cloud capabilities across India.
Microsoft alone committed $17. 5 billion specifically for AI infrastructure development in the country.
Domestic players are also ramping up investments rapidly. Digital Connexion, a joint venture backed by Reliance Industries and Brookfield Asset Management, plans to invest $11 billion by 2030 to develop a 1-gigawatt AI-focused data centre campus in Andhra Pradesh's Visakhapatnam.
Meanwhile, Adani Group announced plans to invest up to $5 billion alongside Google for another AI data centre project.
The policy addresses a critical national security concern for India. With 1,000 million active internet users as of September 2025 and projected eight percent year-on-year growth, India's data generation continues accelerating rapidly.
However, storing 95 percent of this data abroad creates vulnerability and limits domestic businesses' ability to leverage their own information for competitive advantage.
Under the new framework, sales to Indian customers must be routed through locally incorporated resellers and taxed domestically, ensuring the government captures revenue from services delivered to Indian users. This structure protects domestic tax interests while offering international companies complete tax exemption on global revenues generated from Indian data centres.
The policy faces significant implementation challenges despite its attractiveness. Data centres consume enormous quantities of water for server cooling—existing centres used over 150 billion litres in 2025, with projections reaching 358 billion litres within five years.
India's recurring water scarcity during heatwaves and ongoing droughts in many regions create potential constraints. Additionally, data centre energy demands are projected to consume two percent of India's total power supply, potentially conflicting with national decarbonisation objectives.
Experts highlight that while the tax benefits are generous, execution challenges around power availability, land access, and state-level regulatory clearances remain significant hurdles.
The government must coordinate across multiple states and ensure adequate renewable energy capacity to support projected growth from 1.7 GW in 2026 to potentially exceeding 8 gigawatts by 2030.
Do You Know?
India currently generates nearly 20 percent of the world's total data volume—the highest of any nation—yet stores just five percent domestically, creating both an opportunity and a strategic vulnerability that this new tax policy directly addresses.
Key Terms
• Gigawatt (GW): A unit of electrical power equal to one billion watts; used to measure data centre processing capacity
• Safe Harbour: A tax provision offering predetermined profit margins and reduced audit risk for companies meeting specific criteria, eliminating transfer pricing disputes
• Cloud Services: Internet-based computing resources including storage, processing power, and software applications delivered remotely rather than locally
• AI Infrastructure: The underlying computer systems, data centres, and networks required to run artificial intelligence applications and machine learning models
• Transfer Pricing: The allocation of profits between related companies operating in different countries, a common source of tax disputes
Image from Wikimedia Commons