> Yes, *technically* it is illegal.
Oh how many phrases start "Yes,
technically" in my life.
The law is an interesting beast. I know nothing about the law in India as it relates to FM band transmitters but I suspect that the law predates the common availability of adapters that one might use in ones car to add an input to a stereo that lacks such a highly technical circular hole for such purposes[0]. Once these devices gained wide adoption due to both their utility and -- more generally -- the fact that operating one is usually so benign that they can be difficult to discover let alone actually cause enough interference to warrant them to be seized.
The intention of the law was to prevent someone from operating a pirate radio station/give exclusivity to a single license-holder for that frequency. Since these devices don't violate the spirit of the law, the governing body finds it easier to carve out an informal exemption rather than explicitly write one in. It can also be tricky to correct a law that has a very valid reason for existing but may have cases where total enforcement isn't realistic[1].
The law may not have caught up to the reality on the ground and the legislatures answer to it is "enforce it when the interference is enough that someone notices." One might imagine a world where something akin to TV Detector-like Vans[2] drape the country-side in a dragnet to catch all of those pirate FM-input-devices but that usually only happens if there's a substantial amount of tax revenue to be gained ... to pay for the vans.
[0] I had one of these in the 90s (in the US, where it's not illegal if designed correctly) that connected my Discman to my ridiculously sad factory radio which lacked both external input and even a cassette deck.
[1] I do very little with regard to radio communication (if that isn't obvious) but I'd imagine most lawmakers do even less, so now you have to bring in experts to figure out "what's an acceptable amount of interference in this specific use case" and "how should a device like this be restricted." Not that government isn't famous for wildly wasting money or anything but I'd imagine the thinking is that it's not worth the effort to correct.
[2] https://en.wikipedia.org/wiki/TV_detector_van