Document

AI Summary to Minimize your effort

Index

What Is RSU, Full Form, Meaning, Taxation In India And How Do Taxes Work With RSUs?

Q: How are US stock options taxed in India?

US stock options are taxed in two stages.At the time of Exercise - Taxable as Salary Income under Section 17(2) PerquisitesAt the time of Sale- Subsequent sale of allotted stocks will attract capital gain if sold for a higher value than the exercise price.If the holding period is greater than 2 years from the date of exercise, it will be taxed as long-term capital gain with a tax rate of 20%.If the holding period is less than 2 years from the exercise date, it will be taxed as a short-term capital gain at slab rates.

By Mohammed S Chokhawala

Updated on: Jun 25th, 2024

4 min read

Among several benefits employees can get from their employers, RSU is one of them. RSU full form is Restricted Stock Units. A good reward from their employer not only boosts an employee's morale but also encourages them to work harder.

To know in-depth details of these reserved stock units and how they can benefit you, continue reading further.

What is RSU?

Restricted Stock Units (RSUs) are a restricted form of equity incentive that an employer grants to its employees. These are equity shares of the company that come with a vesting period attached to them. Since the employee in question gets them in the form of an incentive, they are not liable to pay any money for it.

However, the vesting period bars the employee from selling that stock until they complete a specified tenure with their employer. The employer can also impose this restriction on the employee's performance, where he would only be able to redeem the shares on achieving a set milestone.

Restrictions on RSU

To have longer vesting period on RSU’s, different types of restrictions can be imposed in India. Listed below are the types of restrictions:

Time- Based Restrictions

Usually RSU’s are provided as a reward to the employee’s loyalty by the company. Hence the restrictions on the vesting period is dependent on the employee’s decision on the previously determined period of retaining their position in the company.

Milestone-Based Restrictions

When an employee is given a milestone to achieve such as achieving a sales figure or revenue generation, on achievement of such targets if the company gives RSUs to the employees then such RSUs are restricted based on milestones achieved by the employee. Therefore, the vesting period in this will end after achieving the target.

Time cum Milestone Restrictions

When a vesting period is dependent on both time and the milestone. Selling such an asset the employee must transcend both the time limit and the milestone previously decided by their employer/company.

Advantages of RSU

Now that you know what RSU is in salary, there are also certain advantages to receiving them. Here are a few major advantages of RSU:

It acts as a morale booster for employees to achieve their targets.
It acts as an incentive for the employee to remain in the organisation.
Employees do not need to make any payments to receive RSU.
Employees get a part of the company’s ownership without having to actually buy it.

Disadvantages of RSU

RSU also has some disadvantages that can make them appear less attractive. Here are some of them:

There is no dividend income attached to these stocks.
The benefits of reserved stock units get revoked after the termination of employment. That means if an employee leaves the organisation during the vesting period, he loses his due RSU.
If it takes too long for an employee to achieve the milestone, the vesting date can get delayed for milestone-based RSU.

Example of Restricted Stock Unit

Let’s say an employee Rishi is promised 3,000 company shares as RSU. As per the vesting schedule, he will receive 1,000 shares every year for 3 years once he completes 1 lakh sales and 1 year with his employer. Once he meets both these conditions, he will start receiving the stocks as per the vesting schedule. To know how to calculate RSU value, always take the fair market value of the share into consideration.

Taxation of RSU in India

RSU taxation in India is the same as any other equity share. For the purpose of taxation, you need to take into consideration the fair market value of the reserved stock units. Fair market value is the price at which these shares are sold on the stock market on the vesting date.

If the employee receives shares of a foreign company, then the exchange rate of the currency on the vesting date shall also be applicable. The tax on RSU is calculated both on vesting and when the employee sells his/her holdings.

Factors in RSU Taxation

Residential status
Your income is taxable in India according to your residential status. If you are a resident, all your income from anywhere in the world is taxed in India. On the other hand, if you are a non-resident or resident but not ordinarily resident and have exercised your options or sold your shares outside India, you are not liable to pay tax in India. Thus determination of Residential status becomes crucial.

Disclosures
Several disclosures have been added to income tax return forms for foreign assets. If you own ESOPs or RSUs of a foreign company, you may have to disclose your foreign holdings under schedule FA of your income tax return. These disclosure requirements are applicable to a resident taxpayer.

When options are not exercised
On the vesting date, the employee gains the right to exercise his option or buy the stocks. But there is no obligation, the employee can choose not to exercise his option. In such a case there shall be no tax implication for the employee.

Tax Implication on RSU on Vesting

There can be three scenarios in this regard:

Sell to Cover: When the stocks are exercised after vesting is complete, the employer is liable to deduct TDS u/s 192 on the fair market value of such exercised option. Continuing with the above example, let’s say Rishi received 1,000 shares in the first year and falls into the tax slab of 30%. Now, the company will sell 300 shares, i.e., 30% of 1,000, on his behalf, and the proceeds shall be paid as tax. Rishi will therefore receive 700 net shares.
Same-day sale: It means that all the shares to be received by employees at vesting are sold off on the same day. The applicable tax value is paid to the government, and the remaining proceeds are transferred to employees. In this method, an employee receives no actual shares but a cash equivalent of its sales proceeds.
Upfront payment: If the employee chooses this method, he/she will pay the tax value applicable to him and get the holding of all the shares.

Proceeds from the sale of RSUs are shown in Form 16 and Form 12BA. It will include the total number of shares vested and not what the employer credited to the employee's account. If you want to know how to save tax on RSU, you can immediately sell your shares on vesting. You would still be liable for TDS, but any capital gain on the sale of RSU can be avoided.

Tax Implication on Sale of RSU Holdings

If an employee sells his/her RSU holdings, any profit made on that transaction is considered a capital gain. The capital gain is taxable as per its period of holding. The tax is applicable irrespective of whether those shares are listed on the Indian stock exchange.

The period of holding in context to RSU is from the date of vesting to the date when the employee sells those shares. The rate of taxation has been discussed below:

	Shares listed on the Indian Stock Exchange	Shares not listed on Indian Stock Exchange
Short-term capital gain	If shares are held for less than 12 months, gains are taxable at 15%	If shares are held for less than 24 months, gains are taxable as per the slab rate.
Long-term capital gain	If shares are held for more than 12 months, gains are taxable at 10%	If shares are held for over 24 months, gains are taxable at 20%
Exemption	LTCG of up to ₹1 lakh is tax-exempt.	No exemption
Indexation	No	Yes, in the case of LTCG

Final Word

If you receive the RSU of a foreign company, you must disclose it under the Foreign Asset Schedule (FAS). You can find this schedule in forms ITR-2, ITR-3. If you paid taxes at vesting by selling shares, those shares wouldn't be mentioned in FAS. While selling your RSU holdings, you pay tax only on the profit made and not the entire value of the shares. This also helps in avoiding double taxation.

You can also get expert-assistance from our Cleartax ESOPs & RSUs Tax Filling.

Related Articles

Can't get yourself started on taxes?

Get a Cleartax expert to handle all your tax filing start-to-finish

Get Cleartax expertise now

Frequently Asked Questions

I have exercised RSU, and my employer has deducted the tax. How do I claim DTAA relief?

If you are a non-resident of the United States, you are not subject to any Federal tax (Income tax) at the time of exercise or at the time of sale (capital gain). An amount that you see which is deducted is a mechanism of ‘sell to cover transactions’. This involves the employer selling a part of the allotted stocks to pay for your Indian Income tax. Such a deducted amount would have been transferred to your employer who will use the same to pay the TDS.

Since there is no double taxation, there won’t be any DTAA.

Can I claim a capital gain exemption on the sale of my RSU?

Yes. You can claim an exemption under section 54F, where the proceeds from the sale of such RSU are re-invested in the purchase of new residential house property (Subject to condition).

From a tax perspective which is better, exercising a stock option in the current FY or later?

From a tax perspective, exercising a stock option will be considered income from salary and will be taxed in the year of exercise at your respective slab rates.

I have received dividend income on my RSU. They have deducted 25% tax. How to treat this in Indian ITR?

Dividends issued by the U.S.A. corporation are subject to a Federal tax of 25%. For Indian Tax Resident, Global Income is taxable in India thus, you are supposed to include such dividend income also in your ITR. Since you are subject to double tax both in India and the U.S.A., you can claim the relief u/s 90 as per Article 10 of India-U.S DTAA on the taxes which are already paid in the U.S.A. You have to file Form 67 before filing your ITR to claim the credit for the same.

Which exchange rate should i consider for conversion from USD to INR if i have sold shares listed in the USA?

As per Rule 115 of the Income tax rule Exchange rate is decided as follows- the last date of the preceding month in which such capital gain is incurred. For example, if you sold shares on 15th Mar 2024, Then you need to use the 29th Feb 2024 exchange rate.

Such exchange rate will be multiplied by the capital gain (U.S.D) to convert the value to INR.

Is the value of RSU - Restricted Stock units included in my CTC?

Yes, the value of RSU will form part of your CTC. Thus it is important to note this while reviewing your salary structure since the RSU component will be vested or granted over a certain period of time, and this is not something which will be part of your in hand salary.

I have the unvested RSU. Am I supposed to declare the same in Schedule FA?

No, the Unvested stock option means you have not yet satisfied the condition of the vesting and equity shares are not yet allocated on the same. Since you are not holding any equity shares, you need not declare the same in Financial Equity or Debt Interest in Schedule FA.

How are US stock options taxed in India?

US stock options are taxed in two stages.

At the time of Exercise - Taxable as Salary Income under Section 17(2) Perquisites
At the time of Sale- Subsequent sale of allotted stocks will attract capital gain if sold for a higher value than the exercise price.
1. If the holding period is greater than 2 years from the date of exercise, it will be taxed as long-term capital gain with a tax rate of 20%.
2. If the holding period is less than 2 years from the exercise date, it will be taxed as a short-term capital gain at slab rates.

What is the vesting period of RSU?

The vesting Period is the time period during which an employee satisfies the condition of vesting. Once the Vesting Period is completed employee get the right to exercise the stocks.

What is the difference between stock options and RSU?

Both stock options and RSU are equity compensation paid to employees, with slight differences. In the case of RSU, Restricted Stock Units are given to the employees at no cost, and Regular Stock options are allotted to employees at a discount. For Example, the Company stock’s market price is Rs 100. In the case of RSU employees will get this stock without making any payment on fulfilling the vesting period. However, in the case of a regular stock option, employees exercise the stocks at, say 20% discount. i.e Employee will have to pay Rs 80 to get Rs 100 worth of Shares.

Help and support

Loading Chat ...

About the Author

Mohammed S Chokhawala

Content Writer

I'm a chartered accountant, well-versed in the ins and outs of income tax, GST, and keeping the books balanced. Numbers are my thing, I can sift through financial statements and tax codes with the best of them. But there's another side to me – a side that thrives on words, not figures. Read more

Quick Summary

RSU stands for Restricted Stock Units, an equity incentive employers grant employees with a vesting period. Different types of restrictions like time-based, milestone-based, or a mix of both can be imposed. Advantages include morale boost and company ownership, disadvantages include lack of dividend income and loss of benefits after leaving. Taxation on RSUs depends on factors like residential status and disclosure requirements.