Budget 2026: Data Centre & AI Stocks Surge Amidst Market Dip Following Tax Holiday Announcement for Cloud Services

February 1, 2026 - In a surprising turn of events during a special holiday trading session, the Indian stock market witnessed a sharp decline immediately following the Union Budget 2026 presentation, while stocks linked to data centers and artificial intelligence (AI) surged. The divergence stemmed from Finance Minister Nirmala Sitharaman's announcement of a long-term tax holiday for foreign companies operating data centers in India, a move intended to establish the nation as a global hub for digital infrastructure.

The overall market experienced a "knee-jerk decline", with the Sensex and Nifty 50 falling nearly 2%. A key factor contributing to this downturn was the increase in the Securities Transaction Tax (STT) on F&O trades, which raised trading costs for active derivatives participants. This STT hike triggered a rapid unwinding of intraday positions as traders recalibrated their near-term strategies. Overall BSE market capitalization dropped by ₹9.72 lakh crore to ₹450.15 lakh crore.

However, amidst this broader market slump, companies associated with the data center ecosystem experienced a significant rally. Investors reacted positively to the proposed tax exemption until 2047 for foreign companies delivering cloud services to global customers from data centers located within India. This long-term policy certainty is designed to encourage substantial capital investments from global hyperscalers.

Real estate developer Anant Raj, which is actively developing data center parks, emerged as a top gainer, climbing 10%. Techno Electric and Engineering surged 8%, fueled by expectations of increased orders for power infrastructure. Netweb Technologies, a supplier of high-performance servers, rose 6% on anticipation of higher demand from new data center projects. Even industrial firms like Cummins India saw a modest 1% gain, as the market priced in sustained demand for power solutions.

Several IT services firms also experienced gains. Coforge, Tata Consultancy Services, Persistent Systems and Wipro all saw their stocks rise by more than 2%. Wipro shares surged 4.6%.

The government's initiative is a direct response to the rapidly growing demand for data processing and storage, fueled by the rise of AI and stricter data localization norms. India currently generates approximately 20% of the world's data but hosts only about 3% of the global data center capacity. By incentivizing the construction of data centers locally, the government seeks to ensure that the computational power required for India's digital economy is available within its borders, enhancing data sovereignty and reducing latency.

However, the tax incentive comes with a key condition: to qualify, these companies must serve their Indian customers through a designated Indian reseller entity. This clause ensures that while global business is attracted, the domestic market structure is also strengthened. The budget also introduced a safe harbor of 15% on cost for instances where the company providing data center services from India is a related entity, a move intended to simplify transfer pricing and reduce potential tax disputes.

The tax holiday aligns with massive investment commitments already made by global technology giants in India. Microsoft has pledged $17.5 billion for AI-related projects, Amazon plans to invest $15 billion over the next five years, and Google has committed $15 billion for developing data centers in partnership with local firms.

Industry experts view the policy as a structural positive. Tarun Pathak, Research Director at Counterpoint Research, noted that the long-term tax certainty supports planning and investment for hyperscalers. He highlighted that the 'reseller hook' also reinforces India's tax sovereignty. The policy is seen as a crucial step to support the country's digital transformation, which is rapidly increasing the need for scalable and sustainable data infrastructure.

The Union Budget 2026 has also announced the launch of India Semiconductor Mission (ISM) 2.0. The budget expands India's AI and digital capabilities through a clearer push for compute capacity, cloud infrastructure and data services. The emphasis on high quality datasets, compute access and specialised training is aimed at accelerating AI use across healthcare, manufacturing, financial services and public administration.

The tax holiday announced in Budget 2026 signals the government's intent to make India a globally competitive destination for data centers and cloud computing. By providing a stable and attractive tax regime, the policy aims to attract foreign investment, build domestic capacity, and provide the foundational infrastructure for the next wave of digital growth, particularly in the field of artificial intelligence.