The changes, first appearing on the screens of the service's 100 million-strong user base on Tuesday, are set to take effect on January 16.
"You hereby grant to Instagram a non-exclusive, fully paid and royalty-free, transferable, sub-licenseable, worldwide license to use the content that you post on or through the service ... You agree that a business or other entity may pay us to display your username, likeness, photos, and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you", the updated Terms of Service (TOS) state.
The Facebook-owned app contended that it is not claiming ownership of people's pictures, just that it can do what it wishes with images.
Speaking to Al Jazeera from Arlington, Virginia, Ryan Radia, a technology expert at the Competitive Enterprise Institute, said though users don't have to give specific consent to the service, "when you send someone your picture ... that's opting-in right there".
However, Radia said it was unlikely that you would see your pictures "on billboards" as a result of the new TOS.
The announcement caused an uproar among the service's devoted user base who took to the micro-blogging service Twitter to share their outrage.
Shaun White, professional snowboarder called the new TOS a "dumb move". Jamie Bell, an actor in the United States, took a harsher tone, warning his 77,000 followers: "For anyone who cares for copyright over their own images & photographs, get off of Instagram now".
Maria Popova, an online editor, said the new TOS "embody just about everything that's wrong with the ad-supported web".
Others, however, took a more comedic approach. Mike Shinoda, of the rock band Linkin Park, referenced one of the service's main criticisms in his response "Why are you so worked up about Instagram? It's not like they're going to be able to sell your lunch/cat/sunset pics anyway".
Instagram issued a statement on Wednesday acknowledging that customers interpreted the company's updated terms as saying it would sell their photos without providing compensation.
"To be clear" it is not our intention to sell your photos," the statement signed by Kevin Systrom, co-founder of Instagram.
"Instagram users own their content and Instagram does not claim any ownership rights over your photos. Nothing about this has changed."
Systrom added that the company will be updating the language in the terms to "make sure this is clear".
Facebook purchased Instagram for $1bn in April.
Source: Al Jazeera and agencies