Is NFT Legal in India? 

Non-fungible tokens (NFTs) have gained immense popularity worldwide, including in India. From digital art and music to collectables and virtual real estate, NFTs are redefining ownership in the digital era. However, with this innovation comes a complex legal landscape, particularly in India, where the regulation of digital assets is still evolving. This article explores the legality of NFTs in India, their taxation, consumer protections, and potential legal implications.

What Are NFTs?

NFTs, or Non-Fungible Tokens, are unique digital assets recorded on a blockchain. Unlike cryptocurrencies, which are interchangeable or “fungible,” NFTs are distinct and cannot be exchanged on a one-to-one basis. Each NFT represents ownership of a specific item or content, such as artwork, music, videos, or virtual collectables.

Ownership vs. Copyright in NFT

A common misconception is that purchasing an NFT confers ownership of the intellectual property (IP) rights associated with the underlying asset. In most cases, buyers only receive a blockchain-authenticated digital certificate of ownership, not the copyright. This means that the buyer has no right to reproduce, distribute, or modify the original work unless explicitly stated in the NFT’s terms of sale.

Legal Status of NFTs in India

The legal landscape surrounding NFTs in India is still in its nascent stages. While no laws explicitly ban or regulate NFTs, they fall under broader legal and regulatory frameworks, including taxation, consumer protection, and intellectual property laws.

 Categorisation as Virtual Digital Assets (VDAs)

In India, NFTs are classified as Virtual Digital Assets (VDAs) under the Income Tax Act, 1961, following amendments introduced in the 2022 budget. This classification subjects NFTs to taxation, but their broader legal framework remains undefined.

Taxation of NFTs

Income generated from NFTs is taxed as follows:

• Flat 30% Tax: Profits from the sale of NFTs are taxed at a flat rate of 30%. No deductions are allowed except for the cost of acquisition.
• 1% Tax Deducted at Source (TDS): A 1% TDS applies to NFT transactions exceeding specific thresholds.

This taxation regime treats NFTs similarly to cryptocurrencies, reinforcing their categorisation as virtual assets rather than traditional goods or securities.

Applicable Laws and Regulations on NFTs

Several existing laws can be applied to NFTs in India, even though they do not specifically address them:

Sales of Goods Act, 1930

NFTs might be considered “goods” under the Sales of Goods Act, 1930, particularly when they are bought and sold on marketplaces. This could mean that implied warranties under the Act, such as the right to title and fitness for purpose, may apply to NFT transactions.

Consumer Protection Act, 2019

The Consumer Protection Act, 2019, and its associated E-commerce Rules, 2020, provide additional safeguards for buyers of NFTs. These laws enable buyers to:

• File complaints about defective digital products.
• Seek remedies for false or misleading advertising of NFTs.

NFT platforms must also adhere to advertising guidelines set by the Advertising Standards Council of India (ASCI), which require risk disclaimers in promotional content.

Intellectual Property (IP) Laws

NFT transactions often involve intellectual property rights, such as copyrights and trademarks. However:

• Copyright Act, 1957: Copyright in the underlying work of an NFT usually remains with the original creator unless explicitly transferred through a written contract.
• Trademarks Act, 1999: Unauthorised use of trademarks in NFTs can lead to trademark infringement claims.

Information Technology (IT) Act, 2000

Under Section 79 of the IT Act, 2000, NFT marketplaces can claim “safe harbour” protection as intermediaries. However, this protection is conditional:

• The platform must act as a neutral facilitator.
• It must not contribute to or have knowledge of infringing activities.

Platforms that fail to enforce IP compliance or profit directly from NFT sales may lose this protection.

Challenges in NFT Legality

Dependency on Cryptocurrency

NFT transactions are typically conducted using cryptocurrencies, such as Ethereum. The legal status of cryptocurrencies in India is uncertain:

• In 2018, the Reserve Bank of India (RBI) issued a circular prohibiting banks from dealing with cryptocurrencies. This was overturned by the Supreme Court in 2020.
• A draft Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, proposed banning private cryptocurrencies but has not yet been enacted.

This regulatory ambiguity complicates the legal status of NFTs, which depend on cryptocurrency ecosystems for trading.

Speculative Nature

NFTs derive value from their rarity and exclusivity, making their prices highly volatile. This speculative nature poses risks for investors and raises concerns about market manipulation and fraud.

Environmental Concerns

NFTs are energy-intensive due to their reliance on blockchain technology. The high carbon footprint of minting and trading NFTs has sparked criticism, further complicating their acceptance.

International Precedents on the Legal Status of NFTs

While India has yet to see significant NFT-related litigation, international cases offer valuable insights into legal challenges:

Shenzhen Qice Diechu Cultural Creativity v Hangzhou Yuanyuzu Technology (China)

China’s first NFT-related copyright case involved the unauthorised minting of an NFT from a copyrighted cartoon series. The court held the marketplace liable for contributory infringement, emphasising the need for platforms to verify IP ownership.

Juventus FC v Blockeras (Italy)

An Italian court ruled against an NFT creator for using Juventus FC trademarks without authorisation, highlighting the applicability of trademark laws to NFTs.

Nike v StockX (USA)

Nike sued StockX for trademark infringement after the platform launched NFTs tied to physical Nike sneakers without approval. This case underscores the importance of distinguishing between NFT ownership and IP rights.

Hermès v Mason Rothschild (USA)

Luxury brand Hermès filed a trademark infringement case over the “MetaBirkin” NFTs, which depicted furry versions of its iconic Birkin bags. The case raises questions about the balance between artistic expression and trademark rights.

Miramax v Quentin Tarantino (USA)

Miramax sued Tarantino over NFT sales related to the film Pulp Fiction, alleging copyright infringement and breach of contract. The case underscores the complexities of IP ownership in NFT transactions.

Future of NFTs in India

The growing popularity of NFTs in India highlights the need for a well-defined legal framework. Key recommendations include:

• Clear Legislation: Enact laws specifically addressing NFTs, distinguishing them from cryptocurrencies and traditional goods.
• Consumer Protections: Strengthen buyer protections by requiring platforms to disclose the rights associated with each NFT.
• Environmental Regulation: Promote eco-friendly blockchain technologies to mitigate the environmental impact of NFTs.

As the NFT ecosystem matures, India’s legal and regulatory landscape will need to evolve to foster innovation while protecting stakeholders.

Conclusion

While NFTs are not explicitly illegal in India, their legal status remains ambiguous. Current laws, such as the Income Tax Act, Consumer Protection Act, and IP laws, provide partial coverage but fail to address the unique challenges posed by NFTs. As NFTs continue to gain traction, comprehensive regulation is essential to ensure their long-term viability and address concerns related to taxation, IP rights, and environmental impact.

India has the opportunity to become a leader in the NFT space by implementing forward-looking policies that balance innovation with legal certainty. Until then, participants in the NFT market must navigate this uncharted territory with caution and diligence.