Restricted Stock Units (RSU): Vesting, Taxability and Reporting in India

24 December 2022 • CS Gyanendu Shekhar

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Restricted Stock Units (RSU): Vesting, Taxability and Reporting in India

24 December 2022 • CS Gyanendu Shekhar

Overview

Restricted Stock Units (RSU) are a form of equity compensation given to the employees / directors of the company in lieu of any cash bonus. This is given free of cost by the company but with some restrictions. The grant of RSU is “restricted” because it is subject to a vesting schedule, which is generally based on length of employment but in some cases, it is additionally linked to performance too. It may also be also be governed by other limitations such as transfers or sales that your company may impose by way of RSU grant Agreement. Many MNCs in India grant RSU of their holding company to compensate their employees / directors in order to retain the employees in the company for a longer period.

How RSU is different from ESOP?

Unlike ESOP, vesting of which is subject to an option exercised by the employee / director at a future date, RSU are granted upfront to the employees / directors with an option of “reverse vesting” (see next para). After the vesting period is over, the RSU are converted to normal stock (equity) and the holder is vested with the voting rights and rights to receive dividends on these shares. Even if the value of shares falls drastically, they still have some value for the holder as the RSU were allotted free of cost, unlike the shares under ESOP.

What is Reverse Vesting?

The RSU are granted upfront to the employees / directors but they are subject to a vesting schedule, that may be a “graded vesting” schedule or a “cliff” vesting schedule. If the receiver of the RSU leaves the company prior to the expiry of vesting period, these RSU (not yet vested) are vested back in favour of the company and hence this transaction is called reverse vesting. For your ease of understanding the two types of vesting schedules are explained below: –

  • Graded Vesting. As the name suggests, the vesting is graded over a period of time, ie. the vesting of a fixed / predetermined percentage of shares happens at regular interval of time. For example, if your company has granted you 1000 RSU with a graded vesting schedule of 25% each year over a period of four years, you will get 25% of your RSU converted to shares on the expiry of one year, 50% of the allotted RSU after the expiry of second year and so on. Once, each portion of the RSU get converted to shares you are eligible to sell those shares.
  • Cliff Vesting. This type of vesting is used when the company desires that the employees shall be retained for a longer period of time. Taking the example quoted above while explaining the graded vesting, you will get all of the 1000 RSU allotted to you converted to regular shares after the expiry of four years, i.e. 100% of the shares are vested after the expiry of the vesting period mentioned in the RSU grant Agreement.

Taxability of Restricted Stock Units (RSU)

The RSU can be taxed after clubbing with the salary as a perquisite and thereafter in Capital gains arising on account of holding such shares. You might be interested to know how the tax is deducted and at what rates if the RSU are vested in a foreign country and sold in a foreign country. To make this understanding clear, we have tried to cover each event one by one in the following pointers: –

  • Grant of RSU. No tax liability as it is just a promise by the employer to get the shares at a future date subject to fulfilment of certain conditions as may be prescribed by the grant agreement.
  • Vesting day (conversion of RSU to shares). As per the vesting schedule a given percentage is transferred to the employee’s account (which may be maintained by some broking house) and the employee gets the right to vote or receive dividend (can be classified as the owner of shares). Now the employee is liable to pay tax on this which is explained below: –
    • The fair market value of the vested shares as on the vesting date is clubbed with the salary of the employee under section 17(2) of the Income Tax Act, 1961 and tax is payable as per the income tax slab rate applicable to the employee. For calculation of the value of perquisite, the exchange rate of the foreign currency prevailing on that particular date is also taken into account.
    • The tax is paid either upfront in cash by the employee or through same day sale of the shares and paying a portion of the sale proceeds as tax. But the most common and default option available to the Indian employees is “sell to cover.”
    • In “sell to cover” method, a portion of the vested shares are sold to meet the tax liability and remaining shares are credited to employee’s account. If you are in 30% tax bracket and you have received 1000 shares, 300 shares will sold to meet the tax liability and remaining 700 will be credited to your account. It means you are holding only 700 shares. Please note that we have ignored the Cess amount here for ease of calculation.
    • At the time of filing ITR, you should declare the holding of foreign shares in schedule FA. While declaring the number of shares, care must be taken that you actually hold 700 shares only as 300 shares were automatically sold to meet the tax liability.
    • Capital Gains. This tax is triggered on account of sale of holdings (explained below). If you have earned some capital gain on account of holding these shares, it must be reported in schedule CG of ITR and you will be liable to capital gain tax as per applicable rates. Since the foreign shares are not listed on Indian stock exchanges, it will be classified as unlisted asset, irrespective of the fact whether they are listed in foreign country or not.
    • Here, the security transaction tax is not paid but the short term and long-term capital gains depending on the period of holding shall be appliable. When sold within 24 months of acquisition, it will be classified as short-term capital asset and will be taxed at the tax rate applicable for your income bracket. When sold after 24 months, it will be classified as long-term capital asset and will be taxed at 20% with indexation benefits. Here, it may please be noted that unlike the listed shares where there is an option to pay 10% tax without indexation, shares received post conversion of RSU will be taxed at 20% (with indexation benefits)only; Income Tax Act, 1961 treats this transaction as a sale of immovable property.
    • If you receive any dividend on these shares, you shall declare it in Schedule OS of ITR.

Is there any double taxation after conversion of RSU to shares?

We often encounter general queries, such as, if there is any double taxation post conversion of RSU to regular shares. This doubt is backed by following transactions: –

  • A percentage of your shares corresponding to your tax liability were already sold to meet the tax liability.
  • Even if you actually received 700 shares, the value of 1000 shares was clubbed to your salary as perquisites and the same is appearing in your Form 16 under section 17(2). The same value corresponding to 1000 shares is being reflected in Form 12BA under stock options.

The shortest answer to this query is NO. These transactions related to RSU are not taxed twice. If they would have been taxed twice, you might have received a document from the foreign tax regulator which would be akin to the Form 16 depicting the amount of tax deducted. This is because, your company has already taken care of such issues and filed necessary declarations to avoid double taxation (in countries having DTAA agreement).

When the stocks were vested, ie. the RSU were converted to regular shares, the “sell to cover” option was used to meet the tax liability and the value of such shares sold (in your case as quoted above, it shall be corresponding to 300 shares) is shown as TDS by your company and the same is reflected in Form 16 Part B.

Capital Gains on RSU

As stated above, the shares (after conversion from RSU) of MNCs are not listed on Indian Stock Exchanges and hence it will be treated as unlisted securities and accordingly capital gain on short term asset or long-term asset depending on the period of holding shall apply. If the RSU were subject to “cliff vesting” and you sold the shares on the vesting date, no capital gain shall be applicable as the shares were vested and sold on the same date. In graded vesting, capital gains may accrue as most of the employees prefer to sell the shares after the expiry of full vesting period or in some cases even the company restricts to sell any shares unless all the RSU get converted to shares after the expiry of vesting period.

Reporting Requirements

Grant of RSU by the foreign company to the employees / directors of its subsidiary / office will be classified as Overseas Portfolio Investment (OPI) by the individual and this shall be reported in Form OPI Part B to the RBI. We have covered this aspect in detail in our blog on Overseas Investment Through ESOP.

Conclusion

In this article we tried to cover all aspects related to grant of RSU; how it helps in retaining employees, how it gives potential to participate in the employer’s success and get rewarded on account of increase in share prices, your tax liability and related reporting.

After grant of RSU, the Indian company transfers funds equal to the market value of the shares to its foreign holding company. It would also be interesting to explore whether such transactions will be counted against capital account transactions or revenue account transactions under section 37 (1) of the Income Tax Act, 1961. Whether it will be booked as employee benefit expense or capital account loss; there are so many contradicting case laws on this. To know about RSU related transactions in the hands of the employer, we recommend you to keep visiting this space as we will shortly publish our next research article on this.

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27 comments

  1. If the company has granted RSUs at the price of $600 for an amount of 100K (166 stocks) vested in 4 installments in 4 years. By the time the first 41 stocks are vested for the first year, the price has fallen to $400. Will the tax be deducted for the vesting price of $600*41 or should it be on the vesting price of $400*41?

    1. Dear Reader,

      There shall not be any tax liability on the grant date as it is just a promise by the employer to get the shares at a future date subject to fulfilment of certain conditions as may be prescribed by the grant agreement.

      The fair market value of the vested shares as on the vesting date is clubbed with the salary of the employee under section 17(2) of the Income Tax Act, 1961 and tax is payable as per the income tax slab rate applicable to the employee. For details, please see the paragraph on taxability.

  2. This is a good article. Thanks for sharing this. Can I set off the capital loss short term and long term from RSU from a US company with Short term and Long term gains in India?

    1. Dear Reader,

      Thanks for the encouraging words. You can set-off the short term and long term capital loss as per the provisions of Income Tax Act 1961. If such shares are held for more than 24 months, they will be classified as Long Term Assets and holding lesser than 24 months shall be classified as Short Term Assets. We would like to bring to your kind notice the following provisions pertaining to Set off and Carry forward of losses under Income Tax Act.

      As per Section 74 of Income Tax Act 1961,

      a) the long-term capital loss must be set off only against income from long-term capital gains. However, short-term capital loss can be set off against income from long-term capital gains as well as short-term capital gains.

      b) if the amount of loss cannot be set off entirely in one financial year, you are allowed to carry forward for 8 assessment years immediately following the assessment year in which the loss was first computed.

      If you feel that we have been able to address your query to your satisfaction, please spare your valuable time to review us on Google.

  3. Hello Samrish,

    This article was highly informative and helped me realise that I should disclose my shares in ITR, Schedule FA even when I am holding it and no sell has happened yet.

    I have a question here. Is there a best time to ‘exercise the rights’ on your vested units. I am holding some vested units of my employer which I haven’t exercised yet. As I haven’t exercised it, it is neither gaining any dividends nor have I paid any withholding tax. Its more than 2 years since the vesting date. The stock is listed in a foreign exchange. What is the best time to exercise this? Does the exchange rate influence this? I understand ‘sell to cover’ is irrespective of the stock price as its the no. of shares that is sold. I don’t have any plans to sell the shares after exercising. Please explain this with respect to the withholding tax in India. I understand that as soon as I exercise, I will be taxed that FY.

    Regards,
    Raghu

    1. Dear Reader,

      Thanks for the encouraging words. Best time to exercises is a personal choice and depends upon the factors you have mentioned. Regarding the taxability, yes you will be taxed as soon as you exercise it, i.e. the RSUs are converted to regular stocks of the company. That will be classified as a perquisite and will be taxed as per the tax bracket applicable in your case.

  4. When I sell my vested shares, the money is deposited to my US broker account. Am I obliged to bring this money back to India or can I directly use it to invest in US stocks?

    1. Dear Reader,

      You can either invest in US shares or repatriate this money to India. Either reinvestment or repatriation shall have to be done in compliance with the new OI Rules. The timelines for repatriation are listed below:

      • If an individual acquires shares that represent less than 10% of the company’s share capital, the individual will be required to repatriate any proceeds related to the securities within 180 days of receipt of such sale proceeds of the shares. This shall not apply if the amounts are reinvested by the individual in compliance with the ODI Regulations within the 180-day period.

      • If an individual acquires shares that represent 10% or more of the company’s share capital, the individual will be required to repatriate the proceeds within 90 days of receipt of such sale proceeds of the shares.

      If you wish to know more about this, please read our blog on Overseas Investment Through ESOP: OPI Under New OI Rules.

  5. My RSU provided by my company are vested. company withheld 42% of shares for TAX and when i check the tax deducted in my pay slip it is 42% straight out, instead of India tax slab based on my income
    My shares are traded in Netherlands(Amsterdam) exchange, kindly clarify did the tax deducted @ source country? and i cant claim any of the extra tax or can i do something in tax returns

    1. Dear Reader,

      Based upon the limited facts shared here, it is understood that you are an employee of an Indian Subsidiary and have paid 42% Tax in Netherlands. If your income is assessed in India (we believe you are filing ITR in India) your Tax liability might be lower. India has Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Netherlands. You can claim credit of Foreign Tax as per Rule 128 of the Income Tax Rules, 1962 at the time of filing ITR.

      You may approach any professional in your area to assist you with this.

  6. First Para says – This is given free of cost by the company but with some restrictions.

    RSUs are not always free of cost. RSUs may given be given free of cost but generally they have exercise price upto face value.

    1. Dear Reader,

      You do not need to exercise an option in order to receive RSUs. RSUs are typically granted outright to employees, without requiring any payment or exercise.

      ESOPs (Employee Stock Option Plans), do require the employee to exercise their options in order to receive shares of company stock. When an employee exercises an option, they purchase shares of company stock at a predetermined exercise price. Once the shares are purchased, the employee can either hold onto them or sell them on the open market.

      RSUs, on the other hand, are usually granted without any exercise price. Instead, the employee receives a promise to receive company stock (as part of their compensation package) at a future date, subject to vesting conditions. Once the RSUs vest, the employee receives the shares of company stock directly, without needing to purchase them through an exercise.

      It’s worth noting that RSUs do not have a face value like traditional stock options. Instead, their value is determined by the current market price of the company’s stock when the RSUs vest. This means that the employee may receive more or less than the original grant value, depending on how the company’s stock price performs over time.

  7. After vesting of RSU, the shares are held in account in USA. Do the holding of these (not selling) needs to be reported in Schedule FA in ITR every year?

    1. Dear Reader,

      Your understanding is correct. The net holding of the foreign shares needs to be reported in Schedule FA in ITR every year till the time they are disposed off.

  8. I was granted RSU’s from an Indian company not listed on the US exchange. At the time of issuing the RSU’s, the Indian government taxed the RSU’s prior to my vesting date. I had to pay 38K to receive the RSU’s. On my W2, it shows the full amount of the dollar value of the RSU’s although the money is still sitting with a broker in India and the share have not been sold. How does this get treated from a tax perspective, can I deduct the 38K that I already paid to the Indian government? Also, how can the US government tax me this as income when it’s still sitting in the Indian stock market. Appreciate any insight. Jim

    1. Dear Reader,

      Please note that tax is not deducted until the shares are vested. A mere right is not considered as perquisite or fringe benefit unless that right is exercised and shares are vested. To address your concern on deduction of tax prior to the vesting date, analysis of your grant agreement is a pre-requisite. You may connect with us for any professional assistance in this regard.

      Your W2 shows the full value of the shares as the full value is the amount of Fringe benefit (or perquisites u/s 17 (2) in India). On the full value of the shares, you have paid the tax which shall also be reflected in your W2. You can utilize this tax amount of 38K to set off the tax liability arising on your total income. When we say total income, the income includes fringe benefit or perquisites too.

      The tax is calculated on the income and residential status of the assessee and not on the origin of income.

  9. Hi,
    I have some RSU and the vesting method is grading. What if I have some capital loss instead of capital gain and its been more than 2 years of me holding those shares, my question is, can we club the loss for some share with the gain of others and tax amount will be on the addition of gain and loss ?
    Does it work this way ?
    Very good article, cleared most of my questions, just have this one.

    1. Dear Reader,

      Please note that if such shares are held for more than 24 months, they will be classified as Long Term Assets. We would like to bring to your kind notice the following provisions pertaining to Set off and Carry forward of losses under Income Tax Act.

      As per Section 74 of Income Tax Act 1961,

      a) the long-term capital loss must be set off only against income from long-term capital gains. However, short-term capital loss can be set off against income from long-term capital gains as well as short-term capital gains.

      b) if the amount of loss cannot be set off entirely in one financial year, you are allowed to carry forward for 8 assessment years immediately following the assessment year in which the loss was first computed.

      Thus, in case you want to set off long-term capital losses ,you can set off long-term capital gains only.

  10. Thank you very much for the excellent Article Sir. Can you please clarify a couple of doubts for RSUs in case of an private limited company. 1. At the end of vesting period i.e. after satisfaction of the conditions by the employee can the company allot shares without even collecting the face value per share? 2. In the “sell to cover” concept who will be purchasing the shares from the employee. Thank you.

    1. Dear Reader,

      Yes, the Company can issue shares without collecting the face value. Further, the “sell to cover” concept typically involves an employee selling a portion of their company stock options or shares to cover the cost of exercising the options or acquiring the shares.

      The transaction is usually facilitated by a brokerage firm or financial institution acting as a middleman. The shares are sold on the open market, and the proceeds are used to cover the cost of exercising the options or acquiring the shares.

      The specific party or parties who purchase the shares will depend on market conditions at the time of the sale. It could be individual investors, institutional investors, or market makers. The brokerage firm or financial institution typically handles the logistics of the sale and ensures that the transaction is executed in a timely and efficient manner.

  11. Hi, can i park the funds after selling the shares in captial gains account to purchase property, to avoid paying captial gains

    1. Dear Reader,

      Subject to the provisions of 54F of the Income Tax Act, 1961 you can purchase residential property to avoid capital gains. Since these shares shall be treated as unlisted shares (not listed in India), they will be classified as immovable capital assets as per Section 2 (14) of the Income Tax Act. So, the period of holding will be determined as per its classification and you should take care that only long term capital gains can be exempted as per Section 54F.

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