Budget 2026 and India’s Data Centre Inflection Point

Sandeep V Dandekar, Data Centre Expert, Author, Advisor, “The Corporate Monk”

Tax Holidays, Safe Harbour and The Power (Nuclear) to Scale AI

Sources and References:

Various websites, Reports & Publication available in public domain and as stated throughout the document

A Turning Point for India’s Data Centre Story

India’s Union Budget 2026–27 is a genuine turning point for the country’s digital infrastructure. For the first time, tax, transfer-pricing and power-sector measures have been stitched together around a simple idea: data centres are now core national infrastructure, not just another real-estate play.[pib.gov]

The long-tenor tax holiday for foreign cloud providers, the 15% safe-harbour regime for related-party pricing, and the emerging policy push on nuclear power and Small Modular Reactors (SMRs) all point in the same direction. If India executes well, these moves can help build 8–10 GW of data-centre capacity by 2030, attract tens of billions of dollars in investment, and place India alongside Singapore and Northern Virginia in the global pecking order. If it does not, the sector will quickly run into familiar bottlenecks: power, transmission, land and skills.telecom.economictimes.indiatimes

2. What Budget 2026 Actually Does for Data Centres

2.1 The core tax and cloud incentives

At the heart of the Budget is a new tax framework aimed squarely at global cloud and AI providers that choose to base infrastructure in India:telecom.economictimes.indiatimes

 A tax holiday until 31 March 2047 for foreign companies that provide cloud or AI services to non-Indian customers, using “specified data centres” located in India.

 A 15% safe-harbour margin for Indian data-centre companies that are related parties of these foreign cloud firms, provided they meet the notified conditions.

In practice, this means:

 Foreign providers such as AWS, Google Cloud or Microsoft Azure will not be taxed in India on income from non-Indian customers, if those services are delivered using qualifying data centres here.[reuters]

 Those qualifying facilities must be set up under a notified MeitY scheme and must be owned and operated by an Indian company.[india-briefing]

 Any services sold to Indian customers must still be routed through an Indian reseller or partner – there is no quiet back-door into the domestic market.[telecom.economictimes.indiatimes]

The safe-harbour provision is equally important on the Indian side. Where an Indian data-centre company belongs to the same group as the foreign cloud provider, it can charge its related party on a cost-plus-15% basis and know that tax officials will accept that pricing as arm’s-length. That drastically reduces the risk of long and expensive transfer-pricing disputes.taxguru

2 IT safe harbour and the GCC ecosystem

The Budget also makes a meaningful change on the IT-services side by widening the reach of safe harbour:economictimes

 The revenue threshold for safe harbour has been raised from ₹300 crore to ₹2,000 crore.

 Multiple categories – IT services, IT-enabled services, KPO and contract R&D – have been merged under a single “Information Technology Services” definition with a 15.5% margin. For India’s large base of Global Capability Centres (GCCs), this combination matters a great deal. India now hosts over half of the world’s GCCs, with close to 2,000 centres employing roughly 2 million people across Bengaluru, Hyderabad, Delhi-NCR, Mumbai, Pune and Chennai.

These centres already handle high-value work in software, analytics and AI. A clearer and more generous safe-harbour regime makes it easier for them to bill their global parents without tax uncertainty – and that, in turn, supports more cloud and data-centre usage inside India.zinnov

3. How Industry is Reading the Signals

3.1 Indian data-centre operators

Indian operators have, unsurprisingly, welcomed the new framework. Leaders at firms such as CtrlS and Nxtra by Airtel have described the tax holiday as a “positive sign for sustained, cost-effective capacity creation” and an “unambiguous signal to global investors.” The market reaction has matched the rhetoric: stocks linked to large data-centre and infrastructure plays, including the Adani group, moved up after the announcement, reflecting expectations of a stronger and more predictable demand pipeline.moneycontrol Their message is straightforward. India was already cost-competitive on construction and day-to-day operations. The missing piece was long-term policy clarity for the cloud customers who actually drive utilisation. Budget 2026 goes a long way towards filling that gap.

3.2 Global hyperscalers and advisors

The global response has also been encouraging. Advisors who work closely with hyperscalers have pointed out that the changes significantly improve India’s attractiveness as a base for global workloads, not just as a market for domestic users. Senior leaders from companies such as Microsoft have openly framed the move as an acknowledgement that digital infrastructure now sits in the same strategic category as roads, ports and railways.cnbc

It is worth remembering that Google, Microsoft and AWS together announced around USD 40 billion of commitments in 2025, even before this Budget. The new tax and safe-harbour regime does not create that trend from scratch, but it reduces the structural risk around how these investments are routed and scaled.caalley

4. India’s Cost Advantage – and Its Ecosystem Gap

4.1 Capex and opex: where India starts ahead

On the raw economics of building and running data centres, India starts from a position of strength. Global market reports from JLL, CBRE, Cushman & Wakefield and others show that India’s median cost to build a megawatt of data-centre capacity is among the lowest in the world – often 30–50% below mature markets such as London or Singapore, and notably lower even than Northern Virginia. Operating costs are also lower on labour and facilities, although power tariffs and volatility remain a concern.spglobal

As land prices in micro-markets like Mumbai, Navi Mumbai and parts of Hyderabad have risen, this advantage has narrowed, but it has not disappeared. Once the 20-year tax holiday is layered on top of construction and opex savings, India’s total cost of ownership is very hard for global players to ignore.[forbesindia]

4.2 Where India may lag: ecosystem maturity / adequacy of supply capacity & lead times Where India clearly trails Virginia or Singapore is in what might be called ecosystem maturity – the invisible plumbing that makes large-scale, repeatable builds possible.

In the most developed hubs, hyperscalers can rely on:kpmg

 Extremely reliable power, often with dedicated high-capacity feeders sized specifically for data-centre clusters.

 Deep local supply chains for transformers, switchgear, chillers and generators, with acceptable and predictable lead times.

 A wide pool of experienced contractors, designers and operations teams who have built and run dozens of large facilities.

 Dense fibre networks and multiple internet exchanges, backed by strong subsea cable diversity.

 Planning and regulatory processes that are strict but also transparent, easy to deal with and time-bound and fairly brisk

The likely Equipment supply bottleneck that may emerge with unfolding time due to a very high collective demand, increasing lead times unless the total manufacturing and supply capability gets enhanced to match the rise in demand, by the top tier OEMs. The Power infrastructure in metros

such as Mumbai is already under visible strain, with data centres taking a growing share of peak demand. The talent pool for high-density, GPU-heavy facilities is improving but not yet as deep as in the most mature markets, and environmental clearances in crowded urban corridors can easily stretch beyond 18–24 months.[indianexpress]

None of this undermines the value of the tax holiday or safe harbour. It simply means that investors, operators and policymakers must treat those tools as part of a broader effort to strengthen the ecosystem, rather than as a silver bullet.

5. Why India Should Attract More Data Centres – and Why It Must Be Careful

5.1 The upside: jobs, exports and digital leverage

Handled well, the Budget 2026 incentives can support:lowyinstitute

 Tens of billions of dollars of new data-centre and cloud investment by 2030.

 Large numbers of construction, engineering and operations jobs across multiple states.

 A meaningful uplift in India’s services exports, as more AI and cloud workloads are run from Indian soil. There is also a strategic benefit. Hosting more of the infrastructure that powers payments, e-commerce, AI and digital government strengthens India’s leverage over its own data and reduces over-reliance on capacity in foreign jurisdictions.[insightsonindia]

5.2 The environmental and grid footprint

At the same time, the power and environmental footprint cannot be ignored. By 2030, data centres in India could consume around 57 TWh of electricity a year, approaching 2–3% of national consumption. Clusters in and around Mumbai, Chennai and Hyderabad are already adding to local grid stress. Water use for cooling, particularly in water-stressed regions, is drawing legitimate concern from communities and regulators.bbc

These risks are manageable, but only if growth is tied to clear guardrails:

 Ambitious but realistic PUE and WUE targets.

 A steadily rising share of renewable energy in data-centre power contracts.

 Smarter use of seawater and air-side cooling where geography allows.

 Better transparency around water and energy use, including environmental impact assessments that are trusted by local stakeholders.dig

5.3 Offshoring from the US and Europe – already underway

In both design and impact, the 20-year tax holiday is crafted to encourage a degree of offshoring of compute from the US, Europe and other regions into India.lowyinstitute Because the benefit is limited to services provided to non-Indian customers, and because qualifying data centres must be Indian-owned and operated, the structure is broadly compatible with most data-sovereignty and data-residency regimes. Sensitive citizen and government datasets will continue to reside in their home jurisdictions where laws require it. But a large universe of other workloads – AI model training, global SaaS back-ends, many enterprise applications – can legitimately be run from India using standard cross-border transfer tools under GDPR and similar frameworks.inductusgcc

This is not hypothetical. Hyperscalers already multi-home their workloads, and India has started to appear on that map. The Budget now gives them a clearer incentive to make India one of their default locations for new global capacity.

5.4 Where India should be cautious

The sensible goal for policymakers is not “as many megawatts as possible, as fast as possible.” It is to grow in a way that is sustainable, geographically balanced and politically durable.

That means:

 Being disciplined about how much additional capacity is permitted in already-stressed urban grids, and actively steering new capacity towards Tier-2 and renewable-rich corridors.

 Linking tax and policy incentives – including “specified data centre” status – to clear environmental and grid-support obligations, rather than treating them as unconditional subsidies.

 Making sure India captures value not just through land and concrete but also in higher-value roles around design, operations, software and optimisation.

6. The Power Question: Why Nuclear and SMRs Belong in

This Conversation

6.1 A looming power constraint No serious discussion of India’s data-centre ambitions can skip the question of power. Capacity is expected to grow from roughly 1.3 GW today to 8–10 GW by 2030, with AI-focused, GPU-heavy racks becoming the norm. These facilities run 24x7 and draw power at densities that were rare a decade ago. Without major investment in generation and transmission – especially in and around key metros – it will be hard to add that much capacity without putting the grid under significant stress.telecom.economictimes.indiatimes

6.2 The SHANTI Act and the nuclear push

This is where India’s nuclear reforms come into the picture. The SHANTI Act of 2025 modernises India’s nuclear-energy framework. Among other things, it:pib

 Opens the door for greater private and joint-venture participation in nuclear power projects, under clear safeguards.

 Aligns India’s liability regime more closely with global norms, removing a major obstacle for international technology providers.

 Strengthens the role of the regulator and provides a clearer, more predictable licensing path.

In parallel, the government has announced a Nuclear Energy Mission with an aspirational target of 100 GW of nuclear capacity by 2047, backed by a ₹20,000 crore allocation for SMR research and development.ibef

6.3 Why nuclear pairs well with data centres

For large data-centre operators, nuclear – and specifically Small Modular Reactors – offers an intriguing fit:gatewayhouse

 SMRs provide stable, high-capacity baseload power with very high-capacity factors, which matches the 24/7 nature of data-centre loads.

 They can, in principle, be located relatively close to major load centres, especially along the coast or in carefully chosen industrial zones.

 They offer low-carbon electricity over long asset lives, which aligns with the decarbonisation commitments of hyperscalers and large enterprises. While India does not yet have any nuclear-powered data centres, groups such as Adani and others have publicly acknowledged that they are evaluating nuclear options to support future AI data-centre expansions. If even a modest portion of the planned nuclear build-out is linked to large data-centre clusters, it will significantly ease the power bottleneck that otherwise threatens to slow the sector.powerline

7. Two Sides of the Same Coin

It is easy to treat the data-centre tax holiday and the nuclear/SMR incentives as unrelated stories. In reality, they are two sides of the same coin.

 The tax and safe-harbour provisions are designed to pull global compute and AI workloads into India, by removing tax and pricing uncertainty.

 The nuclear and broader power-sector measures are meant to ensure that, when that demand arrives, India has enough reliable, reasonably priced, low-carbon electricity to serve it without destabilising the grid.

The Finance Bill has provided a strong starting point. Whether India truly emerges as a leading, sustainable hub for data centres will now depend less on what is written in the statute book and more on how quickly the surrounding ecosystem of power, transmission, fibre, land and skills is built out.

It is, in many ways, a high-quality problem to have. But it is still a problem that calls for deliberate, coordinated action from government, industry and investors over the rest of this decade.