Budget 2026 Explainer: Tax Clarity and Incentives for Cloud, Data Centers & AI Players

India’s Budget 2026–27 introduces long-term tax exemptions for cloud and data centers, electronics manufacturing incentives, and transfer pricing certainty for global tech firms.

India’s central government has placed digital infrastructure at the center of its next phase of economic growth. It has proposed long-term tax incentives for global cloud and data center players, targeted exemptions to support electronics manufacturing, and greater transfer pricing certainty for technology-led businesses, signaling a clear intent to attract global capital while deepening domestic capabilities.

In this explainer, we walk you through key tax measures affecting cloud computing, data centers, electronics manufacturing, and AI-linked infrastructure in India’s 2026-27 Union Budget, outlining who benefits, under what conditions, and what these changes mean for multinational companies operating in India.

Tax exemption for foreign companies using Indian data centers

Q1. What is the key tax incentive announced for global cloud and data center players?

Answer: The budget proposes a tax exemption for income earned by a notified foreign company from providing data center services linked to India. Subject to specified conditions, such income will be exempt from tax in India until March 31, 2047.

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This long-term tax holiday is intended to attract global cloud service providers and anchor their infrastructure within India. 

At present, foreign companies that earn income from activities in India are generally subject to Indian income tax at a corporate rate of around 35 percent on income that accrues or arises in India or is deemed to do so (plus the applicable surcharge and the 4 percent health and education cess).

Q2. How does this exemption practically work for global cloud service providers?

Answer: To qualify for the exemption, global cloud service providers must:

• Use data center infrastructure located in India; and
• Offer cloud services to customers through Indian data centers rather than offshore facilities.

In effect, foreign cloud companies must route their platforms through Indian data centers to access this tax benefit.

Q3. What conditions must the foreign company meet?

Answer: Only foreign companies specifically notified by the central government can claim this exemption. To qualify for the tax exemption criteria, the following criteria must be met:

• The foreign company must not own or operate any physical infrastructure or resources of the data center; and
• All sales to customers in India must be made through an Indian reseller company.

Q4. What qualifies as a “specified data center”?

Answer: A specified data center must:

• Be set up under an approved government scheme;
• Be notified by the Union Ministry of Electronics and IT (MeitY); and
• Be owned and operated by an Indian company.

Q5. What activities are covered under “data center services”?

Answer: Data center services include the use of India-based physical and IT infrastructure such as:

• Land, buildings, power and cooling systems;
• Servers, storage systems, networks, software platforms; and
• Human resource located in India.

Q6. What if services are provided to a related party?

Answer: If data center services are provided between related entities, the transaction will fall under the safe harbor regime, with a fixed profit margin of 15 percent. This is intended to reduce transfer pricing disputes and provide pricing certainty for multinational technology companies.

Separately, the budget has enhanced the eligibility threshold for safe harbour in IT and IT-enabled services, increasing it from INR 3 billion (US$32.78 million) to INR 20 billion (US$218.56 million). This expansion allows a larger number of technology and digital service providers to opt for safe harbour protection, further reducing compliance burden and litigation exposure.

Q7. Does the exemption apply if the cloud service provider is Indian?

Answer: No. The exemption applies only to notified foreign companies, not Indian resident service providers.

Q8. Will the foreign company be taxed if sales in India are made through a reseller?

Answer: No. If the foreign company sells to Indian users only through an Indian reseller, and all conditions are met, the income will not be taxed in India.

Q9. Why has the central government introduced such an extended tax holiday for data centers?

Answer: The policy recognizes data centers and cloud infrastructure as strategic digital infrastructure, on par with roads and power, for enabling exports, artificial intelligence (AI) adoption, and digital services growth.

In the budget announcement, the finance minister highlighted that the objective is to attract global business, enable critical infrastructure, and ensure India remains competitive in the evolving digital and AI landscape.

Tax exemption for foreign companies supplying capital equipment to manufacturers

Q10. What income is exempt?

Answer: Income earned by foreign companies from supplying capital goods, equipment, or tooling to Indian contract manufacturers is proposed to be exempt from taxation in India.

Q11. Who is eligible for this exemption?

Answer: Foreign companies that provide said goods to Indian contract manufacturers are eligible. The exemption applies up to tax year FY 2030-31.

Q12. Who qualifies as a “contract manufacturer”?

Answer: An Indian company that manufactures electronic goods on behalf of a foreign company and operates from a custom-bonded area (as defined under the Customs Act, 1962).

Q13. What is the purpose of this exemption?

Answer: The exemption aims to reduce the need for heavy upfront capital investment by Indian manufacturers, lower production costs, and strengthen India’s position as a global electronics manufacturing hub.

Safe harbor for warehousing of electronic components

Q14. What new measure supports just-in-time logistics in electronics manufacturing?

Answer: The budget proposes a safe harbor margin of 2 percent of invoice value for non-residents warehousing electronic components in bonded warehouses in India.

Q15. What is the effective tax impact of this measure?

Answer: The resultant effective tax incidence is estimated at approximately 0.7 percent, making India more competitive than several peer manufacturing jurisdictions.

Q16. Why is this measure important?

Answer: It facilitates just-in-time supply chains, reduces logistics friction, and complements India’s push to become a preferred destination for electronics and semiconductor-linked manufacturing.

Transfer pricing certainty for technology-led sectors

Q17. What steps has the budget taken to improve tax certainty for IT and technology services?

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Answer: For globally integrated sectors such as IT and technology services, the budget:

• Expands safe harbor provisions; and
• Re-emphasizes time-bound Advance Pricing Agreements (APAs).

Q18. What is the expected impact of these measures?

Answer: These steps are intended to reduce compliance burden, minimize prolonged transfer pricing litigation, and provide greater certainty to multinational enterprises operating in India.

Data centers as enablers of AI and digital growth

Q19. Does the budget announce major new spending on AI?

Answer: No major new AI outlays were announced, unlike the previous year’s India AI Mission. Instead, the budget reinforces a foundational infrastructure-first approach.

Q20. What does this indicate about India’s AI strategy?

Answer: As highlighted in the FY 2025-26 Economic Survey, India is adopting a calibrated approach to AI, prioritizing capacity building over rapid scale.

Under the India AI Mission, the central government spending stood at approximately INR 8 billion (US$87.42 million) in FY 2025-26. For FY 2026-27, INR 10 billion (US$109.2 million) has been allocated against a total outlay of INR 103.72 billion (US$1.13 billion) notified in March 2024.

The emphasis is therefore on strengthening cloud and data center capacity as key enablers of AI adoption.

India’s data center market 

States like Maharashtra and Tamil Nadu have emerged as leading hubs hosting data centers. As of the end of 2025, India solidified its position as one of the fastest-growing global data center markets. India hosts approximately 130+ operational data centers, led by increasing demand for cloud services, enterprise IT workloads, and digital transformation across industries.

Source: India Data Centre H1 2025, Cushman & Wakefield Research

2025 saw several major facilities becoming operational, including Equinix’s CN1 in Chennai and CtrlS Kolkata DC1, indicating ongoing capacity expansion outside traditional metros.

Leading operators by capacity included NTT DATA, CtrlS, Sify Technologies, and ST Telemedia Global Data Centres, supported by both domestic and international capital flows.

Impact of Budget 2026 incentives on India’s data center market outlook in 2026

a) Accelerated localization of cloud infrastructure

The tax exemption provides a strong fiscal incentive for global cloud providers, including Amazon Web Services (AWS), Microsoft Azure and Google Cloud, to expand onshore capacity and fast-track new data center regions. This is likely to increase local deployments, reduce reliance on offshore servicing, and lower cloud costs for Indian enterprises and consumers.

b) Stronger global competitiveness

India’s positioning as a data center destination improves relative to Southeast Asia and the Middle East, supported by:

• Long-term tax certainty through a holiday until 2047,
• Pricing stability via a 15 percent safe harbor for related-party services, and
• Policy continuity recognizing data centers as core infrastructure for AI, cloud, and digital exports.

c) Higher foreign direct investment (FDI) and platform-scale investments

Building on momentum from the previous year, the 2026 tax exemption is expected to:

• Enable larger capital deployment by institutional platforms through acquisitions, co-investments, and partnerships.
• Drive market consolidation ahead of township-scale hyperscale developments, and
• Attract greater private equity and sovereign fund exposure to Indian data center equity and debt, underpinned by rare long-duration tax certainty.

d) Competitive edge for Indian resellers and partners

Mandatory routing through Indian reseller entities strengthens:

• Demand for local system integrators;
• Strategic alliances between global cloud firms and Indian IT and telecom players; and
• Value capture by Indian providers in managed services, hybrid cloud and edge deployments.

Long-term strategic implications

Data center growth in India will be driven by enterprise digitization, public-sector cloud adoption, 5G and edge workloads, AI/ML compute needs, and data localization requirements in regulated sectors. The tax exemption lowers infrastructure costs, directly reinforcing these demand drivers.

The latest measure also aligns with India’s National Data Centre Policy 2025 and broader goals around cloud-first governance, cybersecurity resilience and digital exports, strengthening policy coherence across the digital infrastructure ecosystem.

(US$1 = INR 91.5)

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