Budget 2026: Nirmala Sitharaman announces tax holiday to lure foreign data-centre firms as AI demand surges

Finance Minister Nirmala Sitharaman on 1 February announced a sweeping tax incentive for foreign companies building data centres, as the government moves to attract global cloud providers and ease a growing capacity crunch driven by artificial intelligence and data-localisation rules.

Sitharaman unveiled a “tax holiday” for overseas firms setting up data centres in the country, proposing incentives that run until 2047. The plan introduces a safe harbour of 15% on cost for companies providing cloud services using data centres in India.

The budget also seeks to simplify tax rules for technology providers. All IT services will be clubbed under a single category with a common safe harbour margin of 15.5%, while the revenue threshold for availing safe harbour for IT services will be raised to Rs 2,000 crore from Rs 300 crore. A new automatic, rule-driven model will be introduced to approve safe harbour for IT services.

“As India’s digital transformation accelerates, the need for scalable and sustainable data centre infrastructure is growing rapidly. Data centres are Capex-heavy and India is likely to become a key destination for hyperscalers who are looking to expand esp in APAC and MEA regions. The announcement supports the long-term planning and investment for hyperscalers. The reseller hook further supports tax sovereignty,” Tarun Pathak, research director at Counterpoint Research, told Business Today.

India generates about 20% of global data but hosts only around 3% of the world’s data-centre capacity, creating a sharp supply-demand mismatch.

With the rapid rise of AI applications and tighter government rules on data privacy that require information to be stored locally, demand for capacity to support these workloads has already overtaken supply, Pathak added.

The measures are aimed at positioning India as a key hub for hyperscale cloud infrastructure, particularly as global technology companies accelerate expansion across Asia-Pacific and the Middle East and Africa regions.

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