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

RSU stands for Restricted Stock Units. As the name suggests, these are units of stocks (or shares) given to employees, along with restrictions or conditions attached. These conditions are also known as vesting conditions, which can be for a certain duration or until achievement of a milestone. Unlike ESOPs, RSU's are given to employees free of cost. RSUs are treated as a part of employee benefits and is considered as a part of salary for taxation purposes when it is received. Employees can also sell such shares, and it is treated as capital gain on the year of sale.

This article explains in detail , the meaning of RSU, tax implications on RSU, restrictions or vesting conditions, advantages and disadvantages with examples.

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. Since the employee in question gets them in the form of an incentive, they don't have to pay any money for it. It is provided to them on satisfaction of vesting conditions, usually over a vesting schedule. Let us understand the working mechanism of RSUs along with meaning of vesting conditions and vesting schedule.

Vesting Conditions

Vesting conditions are criteria fixed by the company, satisfaction of which the RSUs will be granted to the employee. It may be based on certain years of service, achievement of certain performance targets, or other restrictions. If these conditions are satisfied, the shares will be ‘vested’ on the employee, he or she will have ownership rights to sell the shares or exercise complete rights over the shares only on vesting of shares.

Vesting Schedule

Vesting schedule is usually the time frame set by the company, during which gradually the shares become vested to the employee.

Let us new understand the working mechanism of RSUs with example.

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. 

In this case, the vesting conditions are: 

1. Completion of 1 year of service (and)
2. Completion of 1 lakh sales

Once he meets both these conditions, he will start receiving the stocks as per the vesting schedule. In this case, the vesting schedule is as follows:

To know how to calculate RSU value, always take the fair market value of the share into consideration. 

Taxation of RSU in India

The tax implications occur at two events for RSUs in India. They are

1. On vesting of RSU
2. On sale of RSU

 The tax on RSU is calculated both on vesting and when the employee sells his/her holdings. The tax implications are explained in detail below.

Tax Implication on RSU on Vesting

On vesting of RSUs, the employees actually get the ownership rights with the shares. It is considered as perquisite, a part of salary in the financial year it is vested. Therefore, it is taxed at slab rates. 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.

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.

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: 

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.

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.

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.

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