In the Union Budget 2026–27 presented by Finance Minister Nirmala Sitharaman on February 1, 2026, the government announced targeted measures to support
digital infrastructure, ease compliance burdens, and boost consumption.
A key highlight was a tax holiday for foreign companies investing in cloud services and data centres in India, aimed at attracting global hyperscalers such as AWS, Microsoft Azure, and Google Cloud. The move aligns with India’s push for AI adoption, cloud scaling, and its ambition to emerge as a global digital hub under the Viksit Bharat vision.
Tax Holiday for Global Cloud Firms
The Finance Minister announced a tax holiday for foreign companies providing cloud services to Indian entities, particularly those investing in or setting up data centres and cloud infrastructure in India.
While the incentive is not explicitly tied to a fixed end date in all official communications, it has been positioned as a long-term measure to encourage localisation, reduce dependence on imported compute resources, and accelerate growth of India’s AI and cloud ecosystem.
Key details:
- The tax holiday applies to foreign firms investing in cloud services through Indian data centres.
- It addresses pre-Budget demands from Nasscom and industry bodies seeking clarity on permanent establishment (PE) risks and incentives to prevent hyperscalers from scaling back India investments.
Rationale:
India’s cloud market is expected to expand rapidly, but high compute costs and regulatory uncertainty have remained bottlenecks. The move complements earlier initiatives such as India Semiconductor Mission 2.0, balancing domestic capability building with foreign investment attraction.
Implications:
Global cloud providers may see reduced tax exposure on India-sourced revenues, encouraging more data centre construction, job creation in technology hubs, and improved access to affordable AI compute for Indian startups and enterprises. Detailed rules on duration, eligibility, and conditions are expected in the Finance Bill 2026 and subsequent notifications.
This reflects a shift toward performance-linked support for digital infrastructure rather than blanket exemptions, while maintaining fiscal discipline.
TCS and TDS Cuts: Simplification and Relief Explained
The Budget also focused on rationalising Tax Collected at Source (TCS) and Tax Deducted at Source (TDS) to reduce compliance friction, improve cash flows, and limit disputes—long-standing demands from individuals and businesses.
TCS Reductions
TCS rates were reduced under the Liberalised Remittance Scheme (LRS) and related overseas transactions:
- TCS on remittances for education and medical purposes reduced from 5% to 2%
- TCS on overseas tour packages cut from 5%/20% (tiered) to a uniform 2%, with no minimum threshold
These changes reduce upfront cash outflows for families funding overseas education, medical treatment, or travel. Since TCS is adjustable against final tax liability, the lower rates improve short-term liquidity.
TDS Changes and Simplifications
- A rule-based automated system for issuing lower or nil TDS certificates for small taxpayers was introduced, removing the need for manual applications to assessing officers in low-risk cases.
- Manpower supply services have been explicitly brought under contractor payments for TDS, capped at 1% or 2%, resolving long-standing ambiguity.
- Broader rationalisation continues, building on earlier Budgets. No major overhaul of the existing 37+ TDS rates was announced, but automation and clarity are expected to reduce disputes and refund delays.
These measures prioritise ease of doing business for salaried individuals, small businesses, and service providers while protecting revenue collections.
Overall Impact and Market Reaction
No major changes were announced to income tax slabs, with the government continuing its preference for the new tax regime introduced in earlier years. The emphasis remained on targeted relief, digital infrastructure growth, and compliance simplification.
Markets responded positively to the cloud tax incentive and TCS/TDS easing, viewing them as supportive of technology investment and middle-class consumption. Analysts see these steps as consistent with expectations of incremental reform rather than large fiscal stimulus.
