Restricted Stock Units (RSUs) are a major component of compensation for employees at multinational giants like Amazon, Google, and Facebook. However, understanding the taxation of RSUs in India is crucial to avoid unexpected tax liabilities and ensure compliance.

At Dinesh Aarjav & Associates, we specialize in RSU taxation advisory, helping professionals minimize tax burdens and stay compliant with both Indian and international tax laws. This comprehensive guide breaks down how RSUs are taxed in India and how you can optimize your tax strategy.

What Are RSUs?

RSUs are stock-based compensation that vests over time based on predefined conditions, such as tenure, performance, or other company-specific criteria. Until the RSUs vest, the employee does not own the shares. Once vested, RSUs become taxable and can be sold at the employee’s discretion.

Taxation of RSUs in India – Step-by-Step Guide

Tax on Grant of RSUs

At the time of grant, no tax liability arises since the employee does not have ownership rights yet.

Tax on Vesting of RSUs

RSUs are treated as a perquisite and taxed under "Income from Salary."

• The Fair Market Value (FMV) on the vesting date is considered part of salary income and taxed as per the employee’s income tax slab rates.
• The Indian employer deducts TDS (Tax Deducted at Source) on this perquisite and deposits it with the Income Tax Department.

Tax on Sale of RSUs

When an employee sells vested RSUs, capital gains tax applies:

• Short-Term Capital Gains (STCG): If sold within 24 months, the gains are taxed as per the individual’s income tax slab rate.
• Long-Term Capital Gains (LTCG): If held for more than 24 months, the gains are taxed at 12.5% (without indexation benefits).

Taxation of RSUs in the US

If you're an Indian resident receiving RSUs from a US employer, understanding US taxation is equally important.

• RSUs are granted under RSU/RSPA programs.

• No tax liability until they are substantially vested (i.e., transferable and not subject to forfeiture).

• On vesting, Fair Market Value (FMV) – Amount Paid per share is considered ordinary income.

• Income is subject to federal + state tax as per applicable rates, along with Social Security + Medicare tax.

• Employer Withholding: Some shares are deducted by the employer for tax withholding before being credited to your brokerage account.

• Sale of Shares: Subject to capital gains tax (short-term or long-term, depending on the holding period).

• Dividend Taxation: Any dividend earned is taxable in the year it is received.

How Are RSUs Processed in India?

• RSUs are typically credited to an employee’s Demat account with a US-based brokerage (e.g., E-Trade, Fidelity, or Charles Schwab).
• The vested RSUs are reported in Form 16 as a perquisite.
• Many brokers automatically sell a portion of the vested shares to cover tax liabilities.

US Tax Implications for Indian Employees

For Indian tax residents, the US tax treatment is different:

• No US tax is levied on vesting of RSUs.
• No US capital gains tax applies when shares are sold, provided the employee submits Form W-8BEN to the broker.

Section 83(b) Election (US-Specific Tax Strategy)

What is Section 83(b) Election? Employees can make an 83(b) election within 30 days of grant to the IRS.

How It Works:

• Effect: FMV at the time of grant is taxed upfront, eliminating tax at the vesting stage.

• Pros: If FMV at grant is lower than at vesting, tax outgo is minimized.

• Cons: If the RSUs are forfeited or lose value, tax paid at grant is non-refundable.

Capital Gains Calculation in India

Capital Gains = Sale Price - FMV on Vesting Date

Losses from RSU sales can be offset against other capital gains as per Indian tax laws.

Compliance & Reporting Requirements

• RSU transactions must be reported in the Income Tax Return (ITR) under Schedule CG (Capital Gains).
• The perquisite value is included in Form 16 and must be accounted for while filing tax returns.
• Foreign Asset Disclosure: RSU holdings in foreign brokerage accounts must be reported under Schedule FA (Foreign Assets) in ITR-2 or ITR-3.

How Dinesh Aarjav & Associates Can Help You

At Dinesh Aarjav & Associates, we provide expert guidance to:

• Optimize RSU taxation through strategic planning.
• Ensure compliance with Indian and international tax laws.
• File ITR-2/ITR-3 with complete foreign asset disclosures.
• Advise on DTAA consultancy and Double Taxation Avoidance Agreement (DTAA) benefits under the India-US treaty.

Conclusion: Don’t Let RSU Taxation Catch You Off Guard!

For Indian tax residents receiving RSUs from US-based companies, taxation occurs at both the vesting and sale stages. Understanding these tax implications can be complex, but with expert NRI tax planning from Dinesh Aarjav & Associates, you can minimize your tax liability and ensure full compliance.

Need expert guidance on RSU taxation? Contact Dinesh Aarjav & Associates today!