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.
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.
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: –
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: –
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: –
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.
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.
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.
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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