Filing ITR With ESOPs and RSUs: Which Form to Use?
- Rashmita Choudhary
- Oct 1
- 9 min read
Employee Stock Option Plans (ESOPs) and Restricted Stock Units (RSUs) are popular forms of employee compensation in India, offering potential wealth creation alongside salary. Filing Income Tax Returns (ITR) for individuals holding ESOPs or RSUs requires careful reporting of perquisites, capital gains, and foreign assets to comply with the Income Tax Act, 1961. Choosing the correct ITR form is crucial to ensure accuracy, avoid penalties, and prevent delays in processing. Accurate disclosure also ensures proper calculation of tax liability on both exercised shares and vested RSUs. Platforms like TaxBuddy simplify this process with expert guidance and automated support.
Table of Contents
Which ITR Form Should You Use for ESOPs and RSUs?
Employees with ESOPs or RSUs typically fall under salaried taxpayers, but the correct ITR form depends on the combination of income sources. For most employees, ITR-2 is suitable if you have salary, capital gains, or foreign assets and no business income. ITR-1 is insufficient if you need to report capital gains from ESOPs or RSUs. Choosing the correct form ensures proper reporting of gains, deductions, and tax liabilities without triggering notices from the Income Tax Department.
Understanding ESOP Taxation and Reporting Guidelines
Employee Stock Option Plans (ESOPs) provide employees with the opportunity to acquire shares of their company at a predetermined price, often below market value. While ESOPs are an attractive form of compensation, they come with specific tax implications that need careful consideration to ensure accurate reporting in your Income Tax Return (ITR).
ESOPs are generally taxed at two distinct stages. The first stage is perquisite taxation. When an employee exercises their stock options, the difference between the fair market value (FMV) of the shares on the date of exercise and the exercise price paid is treated as a perquisite. This perquisite is considered part of the employee's salary and is therefore taxable under the head "Income from Salaries." It is essential to include this amount accurately in the ITR to avoid discrepancies during processing or scrutiny. Proper records such as ESOP exercise statements and the corresponding salary slips can help substantiate the perquisite amount.
The second stage is capital gains taxation. After exercising the options, if the employee sells the acquired shares, any gains realized from the sale are subject to capital gains tax. The classification of the gains as short-term or long-term depends on the holding period of the shares. For listed shares, a holding period of more than 12 months qualifies for long-term capital gains taxation, whereas shares held for less than 12 months are considered short-term. The gains must be reported separately in the ITR form under the appropriate schedule for capital gains. Documentation such as share sale proofs, transaction statements, and ESOP account statements are essential to calculate gains accurately and avoid errors in tax reporting.
In addition, it is important to understand the impact of different regimes, exemptions, and deductions, such as the benefit of long-term capital gains exemption up to ₹1 lakh, which can be claimed under certain conditions. Accurate reporting ensures compliance, prevents unnecessary notices from the tax department, and facilitates smoother processing of refunds where applicable.
Proper understanding of ESOP taxation and maintaining thorough records at each stage—exercise and sale—are critical for precise filing and for leveraging any applicable tax benefits effectively.
Understanding RSU Taxation and Reporting Guidelines
RSUs are generally taxed when the shares are vested and delivered. The fair market value of shares at the time of vesting is considered salary income and taxed accordingly. Any subsequent sale of shares triggers capital gains taxation. Unlike ESOPs, RSUs usually do not require an upfront exercise, making the initial taxation straightforward. Reporting RSUs correctly in the ITR involves including the perquisite amount under salary income and recording subsequent capital gains under the appropriate schedule.
Reporting Foreign ESOPs and RSUs
For employees holding foreign ESOPs or RSUs, taxation can be complex due to differences in international tax treaties and currency conversion. The perquisite is calculated in Indian rupees based on the fair market value on the vesting/exercise date. Capital gains are similarly converted and reported in the ITR. Accurate reporting is critical to comply with Section 9 of the Income Tax Act, which governs income accruing or arising outside India.
Special Provisions for Startup Employees
Startup employees often receive ESOPs at discounted prices or as part of incentive plans. The government provides certain tax benefits under Section 192A for qualified startups, allowing deferred taxation until the shares are sold. Properly documenting the exercise, vesting, and holding period is necessary to leverage these benefits. Startups may also provide guidelines on compliance that must be reflected in the ITR.
Common Mistakes to Avoid While Filing ITR With ESOPs/RSUs
When filing Income Tax Returns (ITR) with income from Employee Stock Option Plans (ESOPs) or Restricted Stock Units (RSUs), several errors can lead to discrepancies, notices, or even penalties. One common mistake is reporting perquisites incorrectly as capital gains. ESOPs and RSUs generate two types of income: the perquisite value at the time of exercise or vesting and the capital gains when the shares are sold. Confusing these two can result in underreporting taxable income or miscalculating the tax liability, which can trigger scrutiny from the Income Tax Department.
Another frequent error is using ITR-1 instead of ITR-2 when capital gains or foreign assets are involved. ITR-1 is meant for salaried or pension income with no capital gains or foreign assets, so filing the wrong form can cause processing delays or notices.
Ignoring TDS credits or mismatches in Form 26AS is also a critical oversight. ESOP/RSU income may have TDS deducted by the employer, and if this is not accurately accounted for, taxpayers may either pay excess tax or face scrutiny for discrepancies.
Foreign ESOP/RSU income must always be converted into Indian Rupees using the applicable exchange rate on the date of vesting, exercise, or sale. Failing to do so can result in errors in income reporting and incorrect tax calculations.
Lastly, maintaining detailed records of vesting, exercise, and sale dates is essential. Without proper documentation, it becomes difficult to accurately calculate perquisite income and capital gains, and substantiating these amounts during any tax assessment or notice becomes challenging.
By carefully avoiding these errors, taxpayers can ensure accurate ITR filing, claim the correct TDS credits, and minimize the risk of notices or penalties, making the entire process smoother and compliant with tax regulations.
Step-by-Step Filing Tips With TaxBuddy
Collect Documents: Before starting the ITR filing process, gather all necessary documents to ensure accurate reporting. This includes your ESOP or RSU statements showing grants, vesting dates, and exercise details, Form 16 issued by your employer, Form 26AS reflecting the TDS deducted on your income, and proofs of transactions such as share sale or purchase confirmations. Having all these documents ready beforehand prevents errors and delays during filing.
Choose Correct ITR Form: Selecting the appropriate ITR form is crucial for correct reporting. For individuals holding ESOPs or RSUs, ITR-2 is generally recommended as it allows for detailed reporting of salary, perquisites, and capital gains. Choosing the wrong form can lead to processing delays or notices from the Income Tax Department. TaxBuddy’s platform automatically suggests the suitable ITR form based on your income sources, helping reduce confusion.
Enter Salary Income: While reporting salary income, include the perquisite value of ESOPs or RSUs granted by your employer. These perquisites are taxable under the head “Income from Salary” and must be accurately included to avoid discrepancies with Form 26AS. TaxBuddy automatically calculates these perquisites based on the documents you upload.
Report Capital Gains: When shares acquired through ESOPs or RSUs are sold, report the transactions under the capital gains schedule. Record accurate details including the date of acquisition, sale date, cost of acquisition, and sale consideration. Accurate reporting ensures proper tax computation and prevents any mismatches with your brokerage or demat statements. TaxBuddy helps auto-calculate capital gains based on the data provided, minimizing manual errors.
Verify TDS Credits: Cross-check that the TDS deducted by your employer or broker matches the details in Form 26AS. Any mismatch may delay refund processing or trigger notices from the tax department. TaxBuddy highlights discrepancies and guides on adjustments, ensuring your TDS details are correctly reflected before filing.
Use TaxBuddy Tools: TaxBuddy offers an intuitive interface where perquisites, salary, and capital gains are automatically calculated based on your uploaded documents. The platform also suggests the correct ITR form and highlights any missing or inconsistent information, making filing efficient and error-free.
File and E-Verify: After entering all the details and reviewing the computation, file your ITR through the TaxBuddy platform. Complete the e-verification using Aadhaar OTP, net banking, or other available methods to ensure timely processing. E-verification is mandatory for the return to be considered valid and accelerates refund issuance.
Conclusion
Filing ITR with ESOPs and RSUs can be complicated, but understanding the correct forms, perquisite and capital gains taxation, and reporting requirements helps ensure compliance. Tools like TaxBuddy simplify this process by guiding employees through accurate calculation, proper form selection, and automated filing. For anyone managing ESOPs or RSUs, using TaxBuddy app platform guarantees a seamless, error-free, and secure tax filing experience.
FAQs
Q1. Which ITR form should I use if I have both ESOPs and RSUs? If you have income from ESOPs (Employee Stock Options) or RSUs (Restricted Stock Units), you generally cannot use ITR-1, as it is only for individuals with income from salary, pension, or interest. For ESOPs and RSUs, ITR-2 is typically required, as it accommodates capital gains, salary perquisites, and other complex income sources. ITR-2 allows detailed reporting of both salary perquisites and any resulting capital gains, ensuring accurate tax computation.
Q2. How is ESOP perquisite taxed in India? ESOP perquisites are taxed as part of your salary under the head “Income from Salaries.” The taxable value is the difference between the fair market value (FMV) of the shares on the date of exercise and the exercise price you paid. This amount is included in your total salary and taxed according to your applicable slab rate. TDS may also be deducted by your employer based on this valuation.
Q3. Do RSUs get taxed at vesting or sale? RSUs are taxed in two stages in India. First, at vesting, the FMV of the shares is treated as a perquisite under “Income from Salaries” and taxed at the applicable slab. Second, when you sell the shares, any gain over the FMV on the vesting date is treated as capital gains, short-term or long-term depending on the holding period, and must be reported in your ITR.
Q4. How do I report capital gains from ESOP shares in ITR? After exercising ESOPs, if you sell the shares, the difference between the selling price and the FMV at exercise is considered a capital gain. Short-term gains apply if shares are sold within 24 months; long-term gains apply if held longer. You need to report these under “Capital Gains” in ITR-2 or ITR-3, specifying details like acquisition cost, sale price, and dates of acquisition and transfer.
Q5. Are foreign ESOPs taxed in India? Yes, foreign ESOPs are taxable in India if you are an Indian resident. The perquisite value at exercise or vesting (for RSUs) is included in your salary income. Any subsequent sale abroad is treated as capital gains, which must be converted into INR using the RBI-approved exchange rate for reporting in your ITR.
Q6. Can startup employees defer ESOP taxation? Certain startups registered with the Department of Revenue may allow deferred taxation on ESOP perquisites under Section 115BAC or other provisions. Typically, taxation is deferred until the shares are sold or listed, but the rules are strict. You must check with your employer and ensure proper documentation to benefit from this deferment while filing your ITR.
Q7. What common mistakes should I avoid when filing ITR with ESOPs?
Reporting only salary but missing capital gains.
Using ITR-1 instead of ITR-2 or ITR-3.
Incorrect FMV or exercise price.
Not reporting TDS already deducted.
Ignoring foreign ESOPs or RSUs. Double-check all details and reconcile with Form 26AS before filing.
Q8. Does TaxBuddy help calculate perquisite value for ESOPs and RSUs? Yes. TaxBuddy provides tools to automatically calculate perquisite value for ESOPs and RSUs based on FMV, exercise price, vesting date, and sale price. It helps you avoid manual errors and ensures correct inclusion in your salary and capital gains sections for accurate ITR filing.
Q9. Can I file ITR-1 if I have capital gains from ESOPs? No. ITR-1 cannot be used if you have capital gains from ESOPs or RSUs. You must use ITR-2 (for individuals without business income) or ITR-3 (if you also have business income) because these forms allow detailed reporting of both salary perquisites and capital gains.
Q10. How do I convert foreign RSU income into INR for filing? Foreign RSU income should be converted into INR using the RBI reference rate on the date of vesting for perquisites and on the date of sale for capital gains. TaxBuddy automatically handles currency conversion when you input the relevant details, ensuring compliance with Income Tax reporting requirements.
Q11. Does TDS on ESOPs/RSUs reflect in Form 26AS automatically? Yes, TDS deducted by your employer on ESOP perquisites or RSU income should reflect in Form 26AS once reported by the employer. You should always reconcile Form 16 with Form 26AS before filing your ITR to ensure all TDS credits are correctly reflected.
Q12. Can TaxBuddy suggest the correct ITR form based on my income sources? Absolutely. TaxBuddy reviews your income sources—including salary, ESOPs, RSUs, capital gains, and foreign income—and recommends the appropriate ITR form (ITR-2 or ITR-3) for accurate filing. It also guides you through reporting perquisites, capital gains, and claiming TDS credits efficiently.
Comments