Taxation of RSUs in India: A Complete Guide for Employees

Understanding how Restricted Stock Units are taxed — at vesting, at sale, and beyond

Restricted Stock Units (RSUs) have become a standard part of compensation for employees at MNCs, tech companies, and startups with global parents. While RSUs can be a valuable wealth-creation tool, they come with a tax treatment that trips up many employees — largely because RSUs are taxed twice, under two different heads of income, at two different points in time. This article breaks down exactly how RSU taxation works in India, so you know what to expect and how to plan for it.

1. What Exactly Is an RSU?

An RSU is a promise by an employer to transfer a specific number of company shares to an employee, subject to a vesting schedule (typically time-based, sometimes performance-based). Unlike stock options (ESOPs), there is no exercise price — once vested, the shares are simply transferred to the employee’s demat account at no cost (or a nominal cost).

For Indian employees, RSUs are commonly granted by:

• The Indian subsidiary of a foreign parent (e.g., a US-listed company granting RSUs to its India employees)
• Indian listed companies granting RSUs to their own employees
• Startups, though ESOPs are more common than RSUs at that stage

2. The Two-Stage Taxation of RSUs

RSU taxation in India happens in two distinct events, and it is critical to treat them separately:

Event	Head of Income	What Is Taxed
Vesting	Salary (Perquisite) u/s 17(2)(vi)	Fair Market Value (FMV) of shares on the vesting date
Sale	Capital Gains	Difference between sale price and FMV on vesting date (the cost of acquisition)

 

Key principle: the FMV at vesting becomes your cost of acquisition for capital gains purposes when you eventually sell. This is what prevents the same appreciation from being taxed twice.

3. Taxation at Vesting — The Perquisite

The moment RSUs vest, their FMV on the vesting date is treated as a perquisite and added to your salary income for that financial year, taxed at your applicable slab rate. This is true even if you do not sell a single share — the mere vesting triggers tax.

How FMV Is Determined

• Listed shares (Indian stock exchange): the average of the opening and closing price on the vesting date
• Shares listed on a recognised stock exchange outside India: the price on that exchange, converted to INR using the State Bank of India’s telegraphic transfer buying rate on the specified date
• Unlisted shares: FMV as determined by a merchant banker as per Rule 3(8) of the Income-tax Rules

TDS on Vesting

Your employer is obligated to deduct TDS on the perquisite value at the time of vesting, just as it would on any other salary component, and reflect it in Form 16 and Form 26AS. For RSUs from a foreign parent, the Indian employer (as the ‘person responsible for paying’) still has this TDS obligation — many employees see a portion of their vested shares withheld or sold (‘sell-to-cover’) to fund this TDS, or a corresponding cash deduction from their regular salary.

Practical tip: Always reconcile the perquisite value reported in your Form 16 with your employer’s RSU statement / broker vesting confirmation before filing your return. Mismatches are a common source of notices.

4. Taxation at Sale — Capital Gains

When you eventually sell the vested shares, capital gains arise on the difference between the sale consideration and the FMV on the date of vesting (which is your cost of acquisition). The holding period is computed from the vesting date to the date of sale — not from the grant date.

Classification: Short-Term vs Long-Term

Type of Share	Long-Term Holding Period	STCG Rate	LTCG Rate
Listed Indian equity shares (STT paid)	More than 12 months	20% (u/s 111A)*	12.5% above ₹1.25 lakh exemption (u/s 112A)*
Foreign listed shares (e.g., US-listed parent) / unlisted shares	More than 24 months	Slab rate	12.5% without indexation*

 

*Rates as per the capital gains regime effective from 23 July 2024 (Finance Act (No. 2), 2024). Please confirm applicable rates and exemption thresholds for the relevant assessment year at the time of filing, since these have seen recent revisions.

For most Indian employees holding RSUs of a US-listed or other foreign parent, the shares fall in the ‘foreign / unlisted’ category above (since no STT is paid on a foreign exchange), so the 24-month test and slab/12.5% rates apply rather than the more favourable listed-equity rates.

5. Foreign Assets Reporting — Schedule FA

If you hold RSUs of a foreign company (typically the US parent of your Indian employer), you are required to disclose these holdings in Schedule FA (Foreign Assets) of your Income Tax Return, regardless of value and even if you have already offered the perquisite to tax. This applies to resident and ordinarily resident (ROR) taxpayers.

• Schedule FA requires details such as country of holding, name of entity, acquisition date, initial investment value, peak value during the calendar year, and closing value
• Note the reporting period for Schedule FA follows the calendar year (January–December), not the Indian financial year — a frequent point of confusion
• Non-disclosure can attract penal consequences under the Black Money Act, 2015, quite apart from income-tax scrutiny, so this should never be treated as optional even for small holdings

6. Dividends on RSU Shares

If the vested shares pay dividends before you sell them, such dividends are taxable in India under ‘Income from Other Sources’ at slab rates. If the shares are of a US company, a 25% US withholding tax typically applies at source, and relief can usually be claimed in India under the India-USA DTAA (subject to filing Form 67 and meeting documentation requirements for the foreign tax credit).

7. A Worked Example

Assume an employee is granted RSUs by the Indian arm of a US-listed company. 100 units vest on 15 June 2024 when the stock trades at $50 (₹83/USD), and the employee sells all 100 shares on 20 August 2025 at $70 (₹85/USD).

Step	Calculation	Amount
FMV at vesting (perquisite)	100 × $50 × ₹83	₹4,15,000 — added to salary income for FY 2024-25, TDS deducted
Cost of acquisition for CG	Same as above	₹4,15,000
Sale consideration	100 × $70 × ₹85	₹5,95,000
Capital gain	₹5,95,000 − ₹4,15,000	₹1,80,000
Holding period	15 Jun 2024 to 20 Aug 2025	~14 months — under 24 months, so short-term
Tax treatment	Foreign unlisted-for-STT-purposes share, held short-term	Taxed at slab rate under ‘Capital Gains’

 

Note that the 39% appreciation the employee saw in dollar terms is further affected by INR movement — both the stock price change and the currency movement between vesting and sale feed into the capital gain calculation, since both legs are converted to INR independently at their respective dates.

8. Common Pitfalls We See

• Forgetting Schedule FA disclosure because ‘the shares were already taxed as salary’
• Using the grant date instead of the vesting date for holding period computation
• Applying listed-equity capital gains rates (with the ₹1.25 lakh LTCG exemption) to foreign shares that don’t qualify for that treatment
• Not reconciling employer sell-to-cover mechanics with actual TDS credited in Form 26AS
• Missing foreign tax credit (Form 67) claims on dividend withholding tax
• Ignoring the calendar-year (not financial-year) basis for Schedule FA reporting

9. Key Takeaways

• RSUs are taxed twice: as salary perquisite at vesting, and as capital gains at sale — but only the post-vesting appreciation is taxed as capital gains
• The vesting-date FMV is your cost of acquisition — track this carefully for every tranche
• Holding period for LTCG/STCG classification starts from vesting, not grant
• Foreign RSU holdings must be disclosed in Schedule FA every year they are held, on a calendar-year basis
• Keep vesting statements, broker contract notes, and Form 26AS reconciled — this documentation is what protects you in the event of a query from the department

 

This article is intended for general guidance only and does not constitute tax advice. RSU taxation involves several fact-specific elements — residential status, treaty relief, employer withholding practices, and share classification among them — and should be evaluated in light of your specific facts. For personalised advice, please reach out to us.

 

Blog By : CA Deepak Mittal