The Hyderabad-native, who is the executive vice president of Microsoft's Cloud and Enterprise group, has been among the front-runners being considered for the top job.
Microsoft is getting closer to naming a CEO with the sentiment inside the company shifting to Nadella, 46, a report in the Wall Street Journal quoted people familiar with the process as saying.
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The WSJ report said as potential candidates outside of Microsoft were ruled out of the CEO hunt, in recent weeks the sentiment inside the company and among people familiar with the process shifted in favour of Nadella.
The Microsoft board is also discussing replacing co-founder Bill Gates as chairman, in what would be a historic shift for the company.
The board is believed to be considering Microsoft lead independent director John Thompson as Gates's replacement.
Nadella is responsible for building and running the company's computing platforms, developer tools and cloud services.
He and his team delivered the 'Cloud OS', Microsoft's next generation backend platform which not only powers all of its Internet scale cloud services but also fuels global enterprises around the world to meet their mission-critical computing needs.
Previously, Nadella was president of Microsoft's 19 billion dollar Server and Tools Business and led the transformation of the business and technology from client-server software to cloud infrastructure and services.
Prior roles include senior vice president of R&D for the Online Services Division and vice president of the Microsoft Business Division.
Before joining Microsoft in 1992, Nadella was a member of the technology staff at Sun Microsystems.
Nadella earned a bachelor's degree in electrical engineering from Mangalore University, a master's degree in computer science from the University of Wisconsin - Milwaukee and a master's degree in business administration from the University of Chicago.
Nadella, if he emerges as the chosen one, would be only the third CEO in Microsoft's 38-year history after Gates and Ballmer.
The appointment would be a significant achievement for Nadella, who would join a proud circle of India-origin executives helming top global companies.
Other Indians at the helm include PepsiCo chairman and chief executive officer Indra Nooyi, MasterCard president and chief executive officer Ajay Banga and Deutsche Bank Co-CEO Anshu Jain.
Disclaimer: An earlier version of the story by mistake had put Micromax store's picture. The picture has now been replaced with the correct Microsft logo image.