Setting Up in India? Why Data Centre Colocation Should Be Part of Your Strategy

India is rapidly expanding its data centre infrastructure as businesses and digital service providers seek scalable, secure, and locally connected computing capacity. Colocation has emerged as a key model in this expansion, allowing companies to deploy IT infrastructure in specialised third-party facilities without the capital and operational commitments associated with building their own data centres.

For foreign technology, cloud, fintech, e-commerce, and other digital businesses, the growing availability of Indian colocation infrastructure creates opportunities to establish and scale local computing operations. Alongside commercial and operational considerations, India’s 2026 tax reforms have introduced changes that may further affect foreign companies procuring data centre services in India. The revised framework removes certain notification requirements and recognises qualifying data centres operated by Indian companies through lease arrangements.

India’s data centre colocation market

India’s colocation data centre market continues to expand as businesses increasingly outsource their infrastructure requirements to specialised data centre operators. Independent market reports indicate that India has approximately 139 operational colocation data centres, with a further 99 facilities in the development pipeline across major data centre hubs.

A separate industry report by Mordor Intelligence states that colocation accounted for around 84.45 per cent of India’s data centre market in 2025, demonstrating the strong preference for third-party infrastructure among enterprises.

Existing data centres are also being retrofitted to support higher-density computing. Competition between colocation and self-build is particularly intense in Mumbai and Bengaluru, where high land prices and electricity costs influence project economics. Data centre operators therefore compete on factors such as cooling efficiency, renewable energy availability, power procurement arrangements, construction speed, and the ability to deliver large blocks of capacity.

The market is also shifting toward multi-megawatt wholesale colocation deployments, reducing the proportion of capacity available for smaller tenants.

Types of colocation data centres

Colocation services can broadly be classified according to the amount of IT capacity required by the customer. 

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1. Retail colocation: Retail colocation generally serves customers requiring up to 250 kW of capacity. It is commonly used by small and medium-sized enterprises that need professional data centre infrastructure without investing in and operating their own facility.

2. Wholesale colocation: Wholesale colocation typically caters to customers requiring more than 250 kW and up to 4 MW of capacity. This model is generally suited to medium and large enterprises that require substantially greater infrastructure capacity and dedicated space than retail customers.

3. Hyperscale colocation: Hyperscale colocation serves customers requiring more than 4 MW of capacity. Demand in this segment primarily comes from large cloud service providers, technology companies, banking, financial services & insurance (BFSI) organisations, and major over-the-top (OTT) and digital content platforms. These customers require highly scalable infrastructure capable of supporting large computing workloads and rapidly expanding digital operations.

Data centre tax exemption in India

Against this market backdrop, India’s tax framework provides a specific incentive for certain foreign companies that procure data centre services from India.

Serial No. 13C of Schedule IV of the Income Tax Act 2025 provides an exemption for specified income of a foreign company arising from the procurement of data centre services from a qualifying data centre in India.

The exemption is available beginning with the tax year 1 April 2026 until the tax year ending 31 March 2047, subject to the conditions and information-furnishing requirements prescribed under the law.

Importantly, this is not a blanket tax exemption for every foreign company using an Indian data centre. The relevant foreign company, service arrangement, and data centre must satisfy the applicable statutory requirements.

The 2026 amendments have changed how businesses establish their eligibility by simplifying certain procedural requirements.

How has the 2026 amendment changed the framework?

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The 2026 amendment removes certain notification requirements that applied under the earlier framework while recognising additional ways in which qualifying data centre facilities can be operated. These changes are particularly relevant to foreign businesses that use third-party colocation infrastructure rather than building their own facilities.

Separate notification for foreign companies removed

Previously, a foreign company seeking to claim the exemption had to be separately notified by the central government.

The 2026 amendment removes this requirement. A foreign company can instead assess its eligibility against the conditions prescribed legally.

This can be particularly relevant for multinational businesses that operate through several subsidiaries, affiliates, or other group entities.

Separate notification for data centres removed

The amendment also eliminates the requirement for the qualifying data centre to receive a separate government notification through the Ministry of Electronics and Information Technology (MeitY).

The focus now focuses on whether the facility meets the statutory definition of a specified data centre and satisfies any additional requirements prescribed under the framework.

Lease-based data centre operations recognised

The revised framework permits an Indian company to operate a specified data centre through ownership or a lease.

This is particularly relevant to the colocation market, where operators may provide data centre capacity from facilities they lease rather than own. The amendment therefore accommodates a commercially common model for providing data centre infrastructure.

Prescribed conditions continue to apply

Although the amendment removes certain notification requirements, it does not remove the underlying eligibility conditions. The specified data centre must continue to satisfy the applicable statutory and prescribed requirements.

Foreign companies and Indian data centre operators should therefore review the detailed eligibility criteria before relying on the exemption.

Information-furnishing requirements

The revised framework relies on information reporting rather than the earlier notification process.

A foreign company providing cloud services and the Indian company providing data centre services must furnish the information required under the applicable rules and in the prescribed manner.

Businesses should maintain documentation supporting their eligibility, service arrangements, data centre operations, and relevant tax filings.

Why is data centre colocation relevant to foreign companies?

For a foreign company entering or expanding in India, colocation can provide a way to establish local IT infrastructure without developing and maintaining an entirely independent data centre.

Under a colocation arrangement, the company places its servers and other IT equipment within a third-party data centre. The operator provides supporting infrastructure and facility services, which may include power, cooling, physical security, connectivity, and related services.

This model can therefore combine the benefits of local infrastructure with the flexibility of outsourcing data centre facility management. For foreign businesses, the decision to use colocation should consequently be assessed from several perspectives, including data governance, connectivity, cloud integration, computing requirements, and future expansion.

Local infrastructure and data governance

Locating infrastructure in India can be useful for foreign companies that need to manage Indian workloads locally.

Depending on the sector and type of information involved, businesses may need to consider the following:

1. Data storage requirements
2. Data processing locations
3. Sector-specific regulations
4. Security controls
5. Internal data governance policies
6. Cross-border data transfers

Colocation can provide the physical infrastructure needed to support a local IT environment. However, using an Indian data centre does not by itself establish compliance with all Indian data protection or localisation requirements. Companies must separately determine which rules apply to their operations.

Supporting hybrid cloud operations

Colocation can also complement public cloud infrastructure.

A foreign company may distribute its workloads between the following:

1. Colocated servers
2. Private cloud infrastructure
3. Public cloud platforms
4. Edge computing environments

Data centres with strong carrier and cloud connectivity can allow businesses to connect these environments without relying exclusively on a single infrastructure model.

This can be useful for companies that need dedicated infrastructure for certain workloads while retaining the flexibility of cloud computing for others.

Supporting AI infrastructure

AI workloads can require substantially greater computing, power, cooling, and networking capacity than conventional enterprise applications.

Foreign companies deploying AI systems in India should assess whether a colocation facility can accommodate:

1. GPU-based computing
2. High-density server deployments
3. Greater power requirements
4. Advanced cooling systems
5. High-speed network connections
6. Future capacity expansion

The suitability of a facility will depend on the company’s particular AI workload and technical requirements.

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What should foreign firms consider when selecting a data centre in India?

Infrastructure resilience

Review the availability and redundancy of power systems, cooling, backup generation, network infrastructure and physical security.

Connectivity

Assess carrier options, cloud connections, network redundancy and latency to target markets.

Security and compliance

Consider whether the facility can support the company’s physical security requirements, information-security controls, audit procedures, regulatory obligations and industry-specific standards.

Expansion capacity

The provider should have sufficient capacity to accommodate future requirements for rack space, power, storage, computing, and network bandwidth.

Tax eligibility

Where the foreign company intends to rely on the 2026 data centre tax exemption, it should separately verify that the company, Indian data centre, service arrangement, and reporting processes satisfy the applicable requirements.

Key takeaway

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India’s 2026 tax amendments create a more flexible framework for certain foreign companies procuring data centre services from India. The removal of separate notification requirements and recognition of leased data centre operations are particularly relevant to foreign businesses using Indian colocation infrastructure.

The exemption remains available until the tax year ending 31 March 2047, subject to the prescribed conditions and reporting requirements. Foreign firms should therefore evaluate the tax framework together with practical considerations such as data governance, connectivity, infrastructure resilience, scalability, security, cloud integration, and AI readiness when assessing data centre colocation options in India.

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