The role of Foreign Direct Investment (FDI) can be considered a significant contribution to the economic development of India, in particular, to accelerating the development of its digital economy. Over the past decade, India has experienced a foreign inflow of investment in such sectors as digital infrastructure, telecommunications, e-commerce, and information technology. The investments have brought about technological advancements, improved innovation systems, and enhanced digital networks across the nation. The study paper examines the effect of foreign direct investment (FDI) on the digital economy of India with a focus on its role in supporting the development of digital infrastructure, technological innovation, employment opportunities, and global value chains. The study looks at the policy framework governing FDI in India, where under the Union Budget 2026-27, the government has introduced major reforms, in particular, the tax holiday of a record four years up to 2047 on foreign cloud companies using Indian based data centres. The findings indicate that FDI has significantly accelerated the process of digital-based economy in India. Still, the issues of regulation and the financial unpredictability of the global economy continue to have an impact on the investment patterns of people. The 2026-27 Budget is a significant shift in the manner in which India attempts to draw in digital foreign direct investment (FDI). It provides an unprecedented tax predictability in the long term, and India is a well-placed rival of cloud computing, artificial intelligence infrastructure and semiconductor manufacturing.