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Understanding Restricted Stock Units (RSUs) in India: Taxation and Benefits

Table of Contents:

Restricted Stock Unit (RSU)

1. Grant of Restricted Stock Units (RSUs) India

The Momentous Announcement

Imagine your company announces that you've been granted RSUs as part of your compensation package. It's like finding a treasure chest with your name on it. But before you start counting your riches, let's dive into the nitty-gritty.

RSUs are essentially a promise from your employer to give you company shares at a later date, usually after a vesting period. At this point, you don't own them yet, so they don't trigger taxation. It's like being given a gift card - it has value, but it's not income until you use it.

Tax Laws Unveiled

Now, let's talk taxes. The Indian Income Tax Laws are your guide here. They specify how Restricted Stock Units (RSUs) in India are taxed when they vest, which means when they become yours to sell or hold.

The key provision to keep in mind is that RSUs are considered a 'perquisite' under Section 17(2) of the Income Tax Act. When RSUs vest, the difference between the fair market value (FMV) of the shares and any amount you pay is added to your taxable income.

Example: If the FMV is INR 1000 per share and you don't pay anything, INR 1000 is added to your income when they vest.

2. Vesting Period

The Waiting Game

Now comes the waiting period - the vesting period. This is the duration you need to endure before you can claim ownership of your RSUs. It's like planting seeds in your garden; you have to wait for the harvest.

Taxing the Wait

During the vesting period, you're in the clear from income tax. Your RSUs are still in the gift card phase, with no taxable value assigned yet. But remember, when they vest, you'll need to declare them as 'perquisites' and pay tax on their value.

3. Receipt of Shares

The Grand Unveiling

Finally, the day arrives when your RSUs vest and you become a shareholder. It's like opening a present you've been eyeing for years. But here's the twist: you might not get as many shares as you expected.

The Tax Twist

When you receive your RSU shares, your employer often withholds a portion for taxes. This is called Tax Deducted at Source (TDS). They want to ensure that taxes are paid on your RSUs.

Example: If you were supposed to get 100 shares, but 30 are withheld for TDS, you'll receive 70. Stay tuned for the next section where we'll delve deeper into the world of tax implications and double taxation concerns. We'll also explore the magic of Form 16 and how it comes to your rescue.

4. Tax Implications

Double Trouble?

As you stand on the threshold of enjoying your hard-earned RSUs, a thought nags at you: "Will I be taxed twice?" The short answer is no. The Indian tax system has provisions to ensure you're not unfairly taxed.

Form 16 Magic

When your employer withholds TDS on your RSUs, it's not lost money. This TDS amount will be reflected in your Form 16, your annual salary statement. Think of it as a credit note for your tax obligations.

Now, when you file your income tax return, you'll see this TDS amount credited against your total tax dues. It's like receiving a discount on your tax bill, thanks to your employer's advance payment on your behalf.

5. DTAA Considerations

Going International

What if your RSUs come from a foreign holding of your company? That's where Double Taxation Avoidance Agreements (DTAA) come into play.

DTAA is like a diplomatic agreement between countries to avoid taxing the same income twice. In your case, it prevents double taxation of your RSUs by India and the country where your company is based.

Navigating DTAA

Specific DTAA provisions define how your RSUs will be taxed. This might involve a lower tax rate or an exemption in one of the countries. The details vary by agreement, so it's crucial to check the specific DTAA between India and your company's home country.

For instance, if the DTAA with your company's home country states that RSUs will be taxed primarily in the home country, India might exempt them or offer a foreign tax credit to prevent double taxation.

To ensure you don't miss out on DTAA benefits, it's advisable to consult a tax expert who can guide you through the specifics of your situation.

6. Cost of Acquisition

Selling RSU Shares

Now, let's fast forward to the moment you decide to sell your RSU shares. Here's where things get a bit tricky regarding taxation. You'll need to determine the cost of acquisition, which is crucial for calculating your capital gains.

The Net Perquisite Method

When you sell RSU shares, the preferred method for calculating the cost of acquisition is the 'net perquisite method.

The value of perquisites as given in Form 16 is reduced by the TDS amount for perquisites (RSU) to arrive at the cost of acquisition. This amount is considered when calculating capital gains tax. Specifically, if an individual sells RSU shares, the capital gains will be calculated on the sale price minus this cost of acquisition.

Example: If the value of the perquisite as per Form 16 is INR 2,00,000 and the TDS on this is INR 60,000, then the cost of acquisition would be INR 1,40,000 (2,00,000 - 60,000).

Another way to calculate the cost of acquisition is by using the fair value of the RSU on the vesting date. You can convert this to the exchange rate of that date and then multiply it by the net quantity of shares received in your account.

Example: If the fair value of RSU on the vesting date is $10 and on that day $1 = INR 70. The number of RSUs vested and received in your account is 100. Therefore, your cost of acquisition would be 10 * 70 * 100 = INR 70,000.

Disclaimer - This FMV method is to be used as a last resort only in case of missing information in form 16 such as separate TDS amount deduction for RSU.

7. Capital Gains

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Calculating Your Gains

Capital gains from selling RSU shares are taxed in India. The tax rate depends on whether your gains are classified as short-term or long-term, which, in turn, depends on your holding period.

  • Short-term capital gains apply if you sell your RSU shares within 24 months of their allotment. These are taxed at your applicable income tax slab rate.

  • Long-term capital gains apply if you hold your RSU shares for more than 24 months. These are taxed at a lower, fixed rate, currently 20% with indexation benefits.

Remember, the cost of acquisition you calculated earlier using the net perquisite method is vital here. It helps you determine your profit accurately.

Example: If your RSUs' net perquisite value was INR 8,000, and you sold them for INR 12,000 after holding for 26 months, your long-term capital gain would be INR 4,000, taxed at 20% (However, up to INR 1,00,000 is exempt from tax in case of Long term gain).

8. Dividend Income

Retaining RSU Shares

Some RSU holders prefer to retain their shares and receive dividends when the company distributes profits. This dividend income is taxed in India as 'income from other sources.'

The tax rate on dividend income depends on your income tax slab rate. It's essential to declare this income in your tax return to ensure compliance with Indian tax laws.

9. Tax Credits for Foreign RSUs

Claiming Tax Credits

If you hold RSUs from a foreign company, there's a specific process to claim tax credits. This involves filing Form 67 under Section 90 or 90A of the Income Tax Act, depending on your situation.

Form 67 is used for claiming relief when you've paid tax on foreign income in a country with which India has a DTAA. However, please note that Form 67 in the case of RSU is specifically for capital gains and dividend income and not for perquisites as RSUs as the employer will already take care of the tax credit on your behalf.

When you file your tax return, ensure you attach Form 67 and other necessary documents to claim the tax credits for any foreign dividend income you've paid tax on.

This comprehensive guide equips you with the knowledge you need to navigate the world of RSUs and their taxation within the framework of Indian Income Tax Laws. Remember, RSUs are a valuable part of your compensation, and understanding their taxation is essential for making informed financial decisions. Always consult a tax professional for personalized advice.

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Jan 24
Rated 4 out of 5 stars.

Has clarified a lot of things for me.

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