However the court limited the scope of the Aadhaar scheme, saying it could not be compulsory for bank accounts, mobile connections or school admissions.
The world's largest biometric ID database covers welfare and tax payments and access to social services.
More than a billion Indians have already been enrolled.
They received a unique 12-digit identification number after submitting their fingerprints and retina scans. About 30 petitioners went to court to argue that the scheme infringed Indians' privacy.
What did the judges say?
"Aadhaar gives dignity to the marginalised. Dignity to the marginalised outweighs privacy," said the five-judge bench, comprising all the sitting judges in the Supreme Court.
"One can't throw the baby out with the bathwater."
Therefore, they said that people would still need their Aadhaar numbers to access government welfare schemes and to pay taxes.
Is India's biometric ID scheme hurting the poor?
However, the court said that private entities including mobile phone operators and banks would no longer have the authority to demand customers' Aadhaar numbers and instructed the government to "bring out a robust data protection law urgently".
It also said that schools could not insist on children's Aadhaar numbers to enrol students, further adding that no child could be denied state welfare benefits for the want of an Aadhaar number.
The judgement was not unanimous.
Two judges of the five-judge bench said that they disagreed with several aspects of the judgement, including the manner in which its legality had been determined in parliament.
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