Non-fungible tokens (NFTs) have gained immense popularity as a new form of digital ownership, allowing creators to monetize unique assets like artwork, music, collectibles, and more. In India, the NFT space is rapidly growing, yet it lacks a comprehensive regulatory framework. This forces NFT platforms to operate within the boundaries of existing laws governing digital assets, taxation, anti-money laundering, consumer protection, data privacy, and intellectual property.

This article offers an in-depth, end-to-end compliance guide for NFT platforms operating in India, covering all the legal, financial, technical, and operational checkpoints required to stay compliant and sustainable in this dynamic space.

⚖️ Legal Landscape & Classification

1.1 Status of NFTs in India

NFTs are currently legal in India. However, they are not regulated by a standalone law. This places them in a legal grey zone, where their classification and compliance requirements are derived from multiple existing statutes.

1.2 Virtual Digital Assets (VDAs)

NFTs are categorized as Virtual Digital Assets (VDAs) under the Finance Act, 2022. This classification subjects NFTs to specific tax treatment and regulatory scrutiny similar to cryptocurrencies.

1.3 Not Securities

Traditional NFTs — those representing art, music, or collectibles — are not classified as securities under Indian securities law. However, NFTs offering fractional ownership, rights to financial returns, or linked to investment schemes could potentially trigger oversight by the Securities and Exchange Board of India (SEBI).

💼 Regulatory Frameworks and Compliance Obligations

2.1 Income Tax and TDS

• Flat 30% Tax: Profits from the sale of NFTs are taxed at a flat rate of 30% under Section 115BBH.
• No Set-Off: Losses from NFT transactions cannot be set off against any other income.
• 1% TDS: Under Section 194S, buyers must deduct 1% TDS on NFT transactions exceeding ₹10,000.

2.2 Goods and Services Tax (GST)

NFTs may be treated as either goods or services depending on the nature of the transaction. Platform operators must:

• Apply 18% GST on platform fees or NFT sales.
• Obtain GST registration if the business crosses threshold limits.
• Maintain proper invoices and tax return filings.

2.3 Equalization Levy

A 2% equalization levy applies to foreign NFT platforms selling to Indian users, under the Finance Act, 2020. This levy is based on gross revenue from Indian transactions.

2.4 Anti-Money Laundering (AML) and KYC

NFT platforms are expected to operate as Reporting Entities under the Prevention of Money Laundering Act (PMLA). Compliance includes:

• KYC for users
• Ongoing transaction monitoring
• Suspicious transaction reports (STRs) to FIU-IND
• Retention of user and transaction records

2.5 Intermediary Compliance (IT Rules, 2021)

NFT platforms qualify as intermediaries under the IT Act and must follow:

• Appointment of Chief Compliance Officer
• Nodal contact person for coordination with law enforcement
• Resident Grievance Officer
• Monthly compliance reports and grievance redress mechanisms

2.6 Consumer Protection

Under the Consumer Protection Act and E-Commerce Rules:

• Platforms must disclose fees, refund and return policies.
• NFT buyers have the right to grievance redress.
• Misrepresentation or defective product claims must be handled transparently.

2.7 Intellectual Property Rights

NFTs typically do not transfer copyright of the underlying digital asset unless explicitly stated. Key considerations include:

• Creators retain moral and economic rights unless assigned.
• Platforms must verify ownership of uploaded content.
• Unauthorized minting can lead to IP infringement claims.

2.8 Advertising and ASCI Guidelines

The Advertising Standards Council of India (ASCI) mandates:

• Risk disclosures in all NFT-related ads
• No misleading terms like “guaranteed returns” or “safe investment”
• Celebrity endorsers are liable for false claims
• Disclaimers must be legible, clear, and properly positioned

2.9 Data Privacy & Protection

With the enactment of the Digital Personal Data Protection Act, 2023, platforms must:

• Collect data only with user consent
• Ensure secure storage and encryption
• Avoid publishing personal data on-chain
• Enable users to exercise data access and erasure rights

🛠️ Operational Compliance Checklist

3.1 Business & Regulatory Setup

• Register with the Financial Intelligence Unit (FIU-IND)
• Establish a legal entity compliant with Indian laws
• Set up KYC/AML policy documents and assign compliance staff

3.2 Tax Infrastructure

• Integrate 1% TDS into smart contract or platform logic
• Maintain tax ledgers for GST and income tax purposes
• Issue TDS certificates to users and file regular returns

3.3 IP Due Diligence

• Require creators to prove ownership of content before minting
• Incorporate IP licensing clauses in Terms of Use and smart contracts
• Develop a DMCA-style takedown procedure for complaints

3.4 Consumer Protection Policies

• Draft and publish transparent refund and cancellation terms
• Provide dispute resolution and customer support
• Clarify platform fees and transaction charges upfront

3.5 Advertising & Influencer Compliance

• Train marketing teams on ASCI guidelines
• Ensure all disclaimers are shown as required
• Maintain contracts with influencers clarifying liability

3.6 IT Intermediary Obligations

• Appoint designated compliance and grievance officers
• Maintain user logs and enable originator tracing
• Respond swiftly to legal requests or takedown notices

3.7 Data Governance

• Conduct data protection impact assessments
• Minimize data stored on-chain
• Encrypt wallets and user credentials

🚀 Smart Contract & Technical Safeguards

4.1 Smart Contract Design

• Include IP usage terms within NFT metadata
• Automate royalty distribution for secondary sales
• Add verification layers to restrict unauthorized minting

4.2 Security & Audits

• Perform smart contract audits by third-party security experts
• Conduct regular penetration testing on APIs and servers
• Set up alerts for suspicious activity or breach attempts

4.3 Wallet & Identity Mapping

• Offer both custodial and non-custodial wallets
• Link wallets to verified KYC profiles
• Implement role-based access control for admin functions

🌐 Cross-Border & Offshore Considerations

5.1 FEMA Implications

NFTs sold to or bought from foreign users may fall under the Foreign Exchange Management Act (FEMA), especially when:

• Funds are sent abroad
• NFTs represent IP created in India but monetized abroad
• Revenue is repatriated into Indian accounts

5.2 Equalization Levy Enforcement

If foreign NFT platforms sell to Indian users, they must pay a 2% levy unless structured through an Indian subsidiary.

5.3 Jurisdiction & Dispute Resolution

NFT platforms must include:

• Indian jurisdiction clauses in Terms of Use
• Arbitration provisions for commercial disputes
• Proper translation of contracts for global users

⚠️ Risk Areas & Mitigation

6.1 Regulatory Uncertainty

Due to the lack of a central NFT law, government policies can change abruptly. Platforms should:

• Regularly monitor SEBI, RBI, and Ministry of Finance updates
• Engage legal advisors for policy tracking
• Build flexible platform logic that can adapt to future mandates

6.2 Fraud & Scams

Anonymous users may mint stolen or plagiarized content. Prevention includes:

• Creator verification mechanisms
• User reporting and content moderation tools
• Blacklisting wallets with known bad activity

6.3 IP Disputes

Platforms are vulnerable to lawsuits if infringing content is hosted or sold. Mitigation:

• IP vetting at the upload stage
• Rights assignment documentation
• Legal indemnity clauses in Terms of Use

6.4 Market Volatility

NFTs are speculative assets. Platforms should:

• Avoid offering investment advice
• Display prominent risk warnings
• Offer educational resources for users

6.5 Data Breaches

Given the blockchain’s permanence, platforms must:

• Store personal data off-chain
• Use pseudonymization where possible
• Conduct regular audits of data access logs

🧭 Emerging Trends & Future Outlook

7.1 Government Policy Developments

India may soon release guidelines or a whitepaper for digital assets, including NFTs. Anticipated measures include:

• Mandatory FIU-IND registration
• SEBI regulation for investment-like NFTs
• Licensing or sandboxes for compliant platforms

7.2 Global Regulatory Alignment

Indian regulators are likely to draw inspiration from:

• FATF guidelines on virtual assets
• European MiCA (Markets in Crypto-Assets) regulations
• U.S. SEC positions on fractional NFTs

7.3 Technology Innovations

Smart contracts are becoming more sophisticated, supporting:

• Dynamic royalties
• Cross-chain interoperability
• Built-in governance and voting rights for NFT holders

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✅ Compliance Roadmap Summary

📌 AML/KYC: Register with FIU-IND, enforce identity checks

📌 Taxation: Deduct 1% TDS, apply 30% income tax, and collect GST

📌 Consumer Protection: Publish transparent refund and complaint policies

📌 IP Management: Verify creator rights, enforce takedown processes

📌 Advertising: Follow ASCI rules, avoid misleading promotions

📌 Tech Security: Audit smart contracts, encrypt sensitive data

📌 Intermediary Rules: Appoint officers, maintain logs, respond to takedown requests

📌 Cross-Border Laws: Evaluate FEMA applicability, equalization levy, and jurisdiction

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🧾 Conclusion

NFT platforms operating in India face a complex but navigable legal environment. There is no single regulation, yet a multitude of laws apply — from taxes to AML to consumer rights. Ensuring compliance is not just about legal obligation but about building trust and longevity in a rapidly evolving digital economy.

By proactively aligning with existing legal frameworks, adopting strong IP and data protection policies, and preparing for future regulation, NFT platforms can position themselves as compliant, secure, and globally competitive players in India's digital asset ecosystem.

Created & Posted by Aashima Verma

Accounts Executive at TAXAJ

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