Nokia will continue to operate the Chennai plant, one of its largest manufacturing facilities, on a service contract for Microsoft. The factory started in 2006, more than a decade after Nokia's India operations began in 1995.
The Chennai plant employs about 8,000 workers, equivalent to about a third of Nokia's 25,000 staff that are being transfered to Microsoft, who will remain on the rolls of the Finnish firm. Nokia will offer a programme of support, including financial assistance, to help employees seek opportunities elsewhere.
Nokia shipped over 250 million units last year, second to Samsung's sales of 446.7 million handsets, according to IDC.
The acquisition also reiterates Microsoft's India-born CEO Satya Nadella's focus on "mobile-first, cloud-first world" as the Redmond (US)-based firm tries to restore the lost glory of a firm that was once the world's largest handset maker.
Nokia lost market share to Samsung and Apple as it struggled to position itself among the fast-changing needs of consumers.
The new firm -- Finnish entity Microsoft Mobile Oy -- will target the affordable mobile devices market, which it says is a USD 50 billion annual opportunity.
The firm had agreed to sell almost all of its Devices and Services (D&S) business to Microsoft in September last year.
Nokia said the Chennai plant will manufacture devices for Microsoft under a service agreement.