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

On February 1, Finance Minister Nirmala Sitharaman introduced an ambitious tax incentive plan aimed at attracting foreign companies to establish data centres in India. This initiative comes as the demand for cloud services surges, driven by advancements in artificial intelligence and stringent data-localization regulations. The proposed 'tax holiday' for international firms setting up operations in the country is designed to run until 2047, allowing companies to benefit from a safe harbour rate of 15% on costs associated with cloud services utilizing Indian data centres. Additionally, the budget seeks to streamline tax regulations for technology providers by consolidating all IT services into a single category, which will have a unified safe harbour margin of 15.5%. Significant changes include increasing the revenue threshold for IT services to qualify for safe harbour benefits from Rs 300 crore to Rs 2,000 crore. A new, automated process will be implemented to facilitate the approval of safe harbour for IT services, simplifying compliance and encouraging investment. According to Tarun Pathak, research director at Counterpoint Research, India's digital transformation is accelerating the need for robust and scalable data centre infrastructure. He highlighted that India, despite generating 20% of the world's data, currently only holds about 3% of global data centre capacity, leading to a significant imbalance between supply and demand. With the swift expansion of AI applications and increasing government mandates for local data storage, the demand for data centre capacity is already surpassing available supply. The government's latest measures are strategically aimed at establishing India as a central hub for hyperscale cloud infrastructure, particularly as international tech firms look to grow their presence in the Asia-Pacific and Middle East regions.