Budget 2026: What is a tax holiday? What Nirmala Sitharaman announced in her Budget speech

Union finance minister Nirmala Sitharaman on Sunday announced a tax holiday till 2047 for foreign companies providing cloud services globally using data centres located in India, signalling a major push to strengthen the country’s digital infrastructure.

Presenting the Union Budget for FY 2026-27 Sitharaman said, “I propose to provide tax holiday till 2047 to any foreign company that provides cloud services to customers globally by using data centre services from India.”

What is a tax holiday?

A tax holiday is a policy measure under which companies are exempted from paying certain taxes for a specified period, typically to encourage investment in priority sectors, reduce initial project costs and attract global players. Governments often use such incentives to promote infrastructure creation and boost long-term economic activity.

Who can avail the tax holiday

The incentive will be available subject to conditions. To qualify, foreign cloud service providers will be required to serve Indian customers through an Indian reseller entity, the finance minister said, underlining the government’s intent to ensure domestic participation alongside global operations.

Sitharaman said the proposal was aimed at enabling critical digital infrastructure and boosting long-term investment in data centres, a sector seen as central to India’s ambitions in cloud computing, artificial intelligence and digital services.

IT services unified under single category

Highlighting India’s position as a global technology hub, Sitharaman announced that software development services, IT-enabled services, knowledge process outsourcing and contract research and development will now be brought under a single category called “Information Technology Services.”

“India is recognised as a global leader in software development services, IT-enabled services, knowledge process outsourcing, and contract R&D services. All these segments to be clubbed under a single category called Information Technology Services,” she said.

The Budget also proposed a common safe harbour margin of 15.5 per cent for all IT services, while increasing the threshold for availing safe harbour provisions from ₹300 crore to ₹2,000 crore.

“A common safe harbour margin of 15.5 per cent will apply to all IT services. The threshold for availing safe harbour increased from Rs 300 crore to Rs 2,000 crore. Safe harbour approvals for IT services will be processed via an automated, rule-driven system, removing the need for examination by tax officers,” Sitharaman said.

Other measures announced

To further support global investment, Sitharaman said the processing time for Advanced Pricing Agreements (APA) will be reduced to two years, with a possible six-month extension. The facility of modified returns will also be extended to associated entities entering into an APA.

Beyond the technology sector, the Budget proposed setting up a National Institute of Hospitality by upgrading the National Council for Hotel Management and establishing a second National Institute of Mental Health and Neurosciences (NIMHANS-2). The government will also develop turtle nesting sites and turtle trails in Odisha, Karnataka and Kerala, and extend deductions for cooperative members supplying cotton seeds and cattle feed.

The long-term tax holiday for cloud service providers marks a key step in India’s effort to position itself as a preferred destination for global data centres and digital services.