NFTs in India: Legal Status, Tax Rules, and Challenges Explained

Non-Fungible Tokens (NFTs) have transformed the digital landscape, dematerializing ownership in art, music, collectibles, and virtual property. With NFTs picking up pace in India, their legality is still a grey area. In this article, we find out if NFTs are legal in India, what taxation policy they come under, what laws govern them, and what challenges lie ahead in adopting NFTs.

What Are NFTs and What Ownership Do They Grant

NFTs are one-of-a-kind digital properties stored on blockchain technology. In contrast to cryptocurrencies like Bitcoin, NFTs are non-interchangeable and denote ownership of a particular digital asset. When you buy an NFT, though, it only provides you with a proof of ownership and not the copyright. You may resell or market the property, but it is usually illegal to modify, reproduce, or distribute it without authorization.

Legal Status of NFTs in India

As of now, there is no particular law in India that directly governs or prohibits NFTs. The 2022 Union Budget only classified NFTs as Virtual Digital Assets (VDA), making them taxable. Apart from taxation, there are no comprehensive regulations on NFT transactions or marketplaces so far.

As of today, NFTs are based mainly on taxation laws, consumer protection laws, and intellectual property laws, but a standalone regulatory approach towards NFTs in India is yet to be found.

NFT Taxation in India

NFT gains are taxed as below:

• 30% Flat Tax: Sales of NFTs are taxed at a flat rate of 30% without any deductions except the cost of acquisition.
• 1% TDS: A 1% Tax Deducted at Source (TDS) is levied on NFT transactions above certain limits.

Applicable Laws That Can Be Used for NFTs

• Sales of Goods Act, 1930: NFTs can be deemed as "goods," in which case particular rights and obligations will be applicable.
• Consumer Protection Act, 2019: Consumers can complain if they buy faulty or counterfeit NFTs.
• Copyright Act, 1957 & Trademarks Act, 1999: IP disputes can occur if creators or vendors of NFTs violate copyrights or trademarks.
• IT Act, 2000: Online marketplaces for NFTs may be regarded as "intermediaries," enjoying safe harbor protection if they adhere to IP legislation.

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Major Challenges Confronting NFTs in India

• Reliance on Cryptocurrency: As most NFTs are purchased using cryptocurrencies, and the crypto regulations in India are not clear, NFTs also suffer from indirect legal ambiguity.
• Speculative Nature and Risk of Scam: NFTs are extremely volatile assets, subject to price manipulation and scams.
• Environmental Issues: NFT minting on proof-of-work blockchains uses high amounts of energy, and environmental issues could hamper mainstream adoption.