Daly was the son of Lieutenant-Colonel Francis Dermot Daly, an officer in the 4th Light Dragoons, and his wife, Mary McIntosh. He joined the Bombay Infantry as an officer cadet in 1840. Along with several similarly-aged young officers, such as Herbert Edwardes and Patrick Alexander Vans Agnew, Daly was sent to "advise" the Sikhs as part of Henry Lawrence's "Young Men". He served in the Second Anglo-Sikh War and was present at the Siege of Multan. On 18 May 1849, he raised the 1st Punjab Irregular Cavalry, which subsequently became the 21st Prince Albert Victor's Own Cavalry (Frontier Force) (Daly's Horse). Daly was promoted to the rank of captain in 1854 and led his regiment during the Indian Mutiny. The regiment operated in North India and took part in the Siege of Delhi and the Relief of Lucknow. He went on the command the Brigade of Hodson's Horse during the war. Daly was twice recommended for the Victoria Cross as a result of his conduct.