21-Year Tax Holiday, Rs 2,000 Crore Safe Harbour: India's Data Centre Bet

India on Sunday offered foreign companies providing cloud services a 21-year tax holiday in return for setting up data centres in the country, in an announcement designed to boost the growth of the information technology and artificial intelligence spaces.

Presenting the 2026 union budget, Finance Minister Nirmala Sitharaman attributed the holiday – and a 15 per cent safe harbour with a threshold of Rs 2,000 crore - if the company providing the data centre services is Indian – to recognising the need to enable critical infrastructure and attract investment.

In a press note after the budget was tabled, the government said data centres, particularly those related to AI, "play a critical role in the infrastructure layer of sectoral architecture".

The tax holiday + safe harbour proposal, IT Minister Ashwini Vaishnaw said, was part of a "long-term policy framework… positions India among leading destinations for AI, cloud infrastructure."

The numbers

Data centre capacity in India reached 1.5 GW, or gigawatts, across seven major Indian cities by the end of last year, i.e., 2025. And it is expected to cross 1.7 GW by the end of this year.

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Enhanced AI and cloud-related services, powered by data stored within the country, is widely seen as essential to support the Indian economy as it bids to cross the trillion-dollar mark.

The data is there with more coming with over 1,000 million active internet users as of September 2025 and an estimated eight per cent year-on-year increase in that number.

The AI tax holiday

The proposals are widely expected to interest global tech giants like Google, Microsoft, and Amazon, which require massive computing capacity to run their AI and cloud services.

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As of Q3 2025, the three companies' products - Cloud, Azure, and AWS – control a massive 63 per cent of the global cloud infrastructure market, and all three have already turned their attention to India to set up data centres needed to keep these essential services running.

This is a big money game; last year, for example, the three separately announced over $30 billion, to be spent over the next 14 years, to expand cloud and AI infrastructure in the country.

This focus on data storage isn't just a business gamble. It is also about controlling data – arguably an important strategic asset for businesses and governments in today's world.

Why it is important

India is an important source of that data; it generates nearly 20 per cent of the world's data, according to the Economic Survey for 2025/26. But it lacks the capacity to store that volume.

This means an estimated 95 per cent of data from Indian nationals is processed or stored abroad, which is a potential national security issue and also a challenge to Indian businesses.

Photo Credit: Image generated by AI

The offer of a tax holiday, therefore, is expected to help bridge the divide between generation and storage, while also ensuring a boost for the economy and more jobs. It will also alleviate foreign companies' concerns about future taxes on global income via localised data centres.

And by offering that longer window foreign firms can commit to bigger capex investments, i.e., build more data centres and expand dedicated AI capabilities. This, in turn, drives down cost of computing and Indian businesses, including start-ups, can benefit from better cloud pricing.

What are the challenges

Data centres are infamously capital resources-hungry and require massive amounts of electricity (to run the computers), water (to cool servers), and land (on which to build).

The water needs alone, for example, are staggering; a report by British broadcaster BBC estimated existing centres used over 150 billion litres in 2025 and this could increase to 358 billion in five years.

These are significant challenges, particularly the supply of water in a country that regularly experiences heatwaves and droughts, a horrible combination, and in which millions, even today, do not have safe drinking water available in their homes.

Concurrently, data centre growth also has an impact on the country's energy supply, i.e., the increased use of power that could counter national decarbonisation plans. The International Energy Agency expects data centres' power needs to take up two per cent of total supply.

Clean and renewable energy sources are key but these are still not widely available.

The offset, though, is that India can offer these resources far cheaper than rivals like China and even, in some cases, western nations like the United States and Japan. And the reality is the world now runs on data and India must move to secure its position in such a world.