NFTs (Non-Fungible Tokens) have revolutionized the digital world. NFTs have changed the definition of ownership in the world of digital assets like art, music, collectibles, and virtual real estate. NFTs are also becoming increasingly popular in India. But while their demand has increased, many questions have started arising about their legal status. The law for digital assets in India is still developing, and the status of NFTs is not completely clear. In this blog, we will discuss the legal status of NFTs in India, how they are taxed, which laws affect them, and what legal challenges may be faced in the future.
What is an NFT, and what ownership does it give?
NFTs, or non-fungible tokens, are digital assets that are recorded on blockchain technology. They are unique and cannot be replaced with each other. For example, one bitcoin can be replaced with another bitcoin, but one NFT cannot be replaced by another NFT.
An important thing to understand here is that when you buy an NFT, you only get an “ownership certificate” of that digital item, not its copyright rights. That is, if you have bought an NFT of an artwork, you can promote or resell it, but cannot reproduce, modify, or distribute it without permission.
Legal status of NFTs in India
There is no direct law on NFTs in India that explicitly regulates or bans them. Let us tell you that in the 2022 budget, the Government of India placed NFTs in the category of Virtual Digital Assets (VDA). Since then, the government has not talked about it in any budget session. This determined the taxable status of NFTs, but the rules for their transaction or exchange are still not fully decided. At present, NFTs are mainly subject to taxation, consumer protection, and intellectual property laws, but no dedicated regulatory framework has been created for them yet.
NFT Taxation and Applicable Laws
Profits from NFTs are taxed in India:
- 30% flat tax: Profit from selling NFT is taxed at a flat rate of 30%. No deductions are allowed except the buying price.
- 1% TDS: If the NFT transaction exceeds a certain limit, then 1% TDS (Tax Deducted at Source) is also applicable on it.
Laws that may apply to NFTs:
- Sales of Goods Act, 1930: If an NFT is considered “goods”, certain rights and obligations may apply to its sale.
- Consumer Protection Act, 2019: Consumers who purchase NFTs can lodge complaints, especially if a fake or defective NFT is sold to them.
- Copyright Act, 1957, and Trademarks Act, 1999: Copyright and trademark infringements involving NFTs are actionable.
- IT Act, 2000: NFT marketplace platforms may get safe harbour protection as an “intermediary”, provided they comply with IP laws.
Key challenges associated with NFTs in India
Dependence on cryptocurrency: Most NFT transactions take place through cryptocurrency. The legal status of cryptocurrency in India is still unclear. Although the Supreme Court lifted the RBI ban in 2020, there is still no fully clear regulation. This also affects the legal status of NFTs.
Speculative nature and risk of fraud: The value of NFTs is based on their uniqueness and demand, which is often very volatile. This increases the risk of fraud, fake projects, and market manipulation.
Environmental impact: Minting and transferring NFTs consume much energy, especially on proof-of-work blockchains. This has also raised environmental concerns, which could hinder their general acceptance.
NFTs are currently legally allowed in India, but their status is uncertain due to the lack of a dedicated regulatory framework. Although they are covered under taxation and some existing laws, it is still important to be cautious while making investments or transactions related to NFTs. As the laws on digital assets develop in India in the future, both the legal clarity and growth of NFTs are expected to increase. For now, NFT buyers and creators need to enter this field while keeping all the legal aspects in mind.