Finnish phone maker Nokia's said Indian tax officials raided its production unit in Chennai on Tuesday.
A company spokesman said it was cooperating with the probe, although he could not elaborate on what local authorities were looking for. The Chennai plant is one of Nokia's biggest facilities.
A senior Indian tax official said the investigation related to allegations that the company may have evaded around Rs 3,000 crore in taxes.
"We are suspecting a default in TDS (tax deducted at source) on payments to other countries against software supplies," said the tax official, who declined to be named.
Nokia shares fell 2.3% to 3.20 euros by 1142 GMT.
Finance minister, P. Chidambaram, has vowed to clamp down on tax evasion to help the country plug a widening fiscal deficit.
In November, a junior finance minister said India was investigating the local unit of chocolate maker Cadbury over taxes.