Budget 2026 has introduced a 21‑year tax holiday and a ₹2,000 crore safe harbour for data centres, especially those powering AI and cloud services, positioning India as a global hub for digital infrastructure.
The 21‑year tax holiday for cloud and data centre services : what it means
- Foreign and domestic companies providing cloud and data centre services will get a 21‑year tax holiday (till 2047) if they set up data centres in India, with a 15% safe harbour rate for Indian providers (threshold ₹2,000 crore).
- IT Minister Ashwini Vaishnaw called it a “long‑term policy framework” to attract massive investments from global giants like Google, Microsoft and Amazon.
- The move targets AI and cloud infrastructure, recognising data centres as the “critical infrastructure layer” for digital growth.
Why data centres matter now
- India’s data centre capacity hit 1.5 GW across seven major cities by end‑2025 and is projected to cross 1.7 GW by end‑2026, driven by exploding demand from 1,000 million active internet users (growing 8% YoY).
- India generates 20% of global data but stores/processes 95% of it abroad, raising national security concerns and limiting local AI/cloud development.
- Global giants like Google, Microsoft and Amazon (controlling 63% of cloud market) have committed over $30 billion for India’s cloud/AI infra over 14 years, but tax certainty was a key hurdle.
Challenges data centres face
- Data centres are capital, power, water and land‑intensive:
- Power: Need massive electricity (expected to hit 2% of national supply).
- Water: Existing centres used 150 billion litres in 2025, projected to double to 358 billion by 2030.
- Land: Large tracts needed for hyperscale facilities.
- India’s challenges like heatwaves, droughts, power shortages and land acquisition make scaling tough, but lower costs than China/US/Japan give a competitive edge.
Advantages of the data centre tax holiday
- 21‑year certainty enables massive capex commitments from global hyperscalers for AI/cloud buildout.
- Attracts $10s of billions from Google, Microsoft, Amazon to build local storage/processing, reducing 95% foreign data dependency.
- Creates jobs and ecosystem in power, cooling, construction, fibre optics and tech services.
- Lowers cloud/AI compute costs for Indian startups/SMEs via local hyperscale capacity.
- Positions India as a global AI/cloud hub, leveraging cheap land/power and 20% of world data generation.
Risks and challenges
- Power demand could spike to 2% of national supply, straining grids and clashing with decarbonisation goals (renewables still limited).
- Water usage (150–358 billion litres) is massive in a drought‑prone country where millions lack clean drinking water.
- Land acquisition hurdles and NIMBY resistance in urban areas for hyperscale facilities.
- Tax holiday may not guarantee investments if power/water/land issues persist or global cloud demand shifts.
- Data sovereignty risks if foreign firms dominate; need for local players and regulations.
FAQs on Budget 2026 data centre tax holiday
1. What exactly is the 21‑year tax holiday for data centres?
Foreign cloud/data centre providers get a 21‑year tax holiday (till 2047); Indian providers get a 15% safe harbour rate above ₹2,000 crore threshold.
2. Why is this happening now?
India generates 20% of global data but stores 95% abroad; tax certainty attracts Google, Microsoft, Amazon’s $30+ billion cloud/AI investments.
3. How big is India’s data centre market?
Capacity reached 1.5 GW by end‑2025 across seven cities, projected to exceed 1.7 GW by end‑2026.
4. What are the biggest hurdles for data centres in India?
Massive power (2% national supply), water (150–358 billion litres) and land needs amid heatwaves/droughts; renewables lag.
5. Will this create jobs and lower costs?
Yes – builds ecosystem (power, cooling, construction) and cuts AI/cloud compute costs for Indian businesses via local hyperscale capacity.
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