RSU, Full Form, Meaning, and Taxation in India: A Detailed Guide
- Farheen Mukadam
- Sep 9
- 9 min read
RSU is an acronym for Restricted Stock Units. Employees are granted units of stock (or shares), asthe name implies, with limitations or requirements attached. These conditions are for a specific amount of time or until a milestone is reached. Therefore, they are also referred to as vesting conditions. In contrast to ESOPs, RSUs are provided to staff members at no cost. RSUs are regarded as part of employee benefits and, at the time of receipt, are included in the salary for tax purposes. Employees may also sell these shares, and in the year of sale, the sale is recognised as a capital gain.
Table of Contents
What are RSUs: Full Form and Meaning
A corporation may offer Restricted Stock Units (RSUs) as a form of employee benefit or compensation. In essence, they guarantee that an employee will get business shares according to a certain timeline. A business might choose to provide them as a new hire incentive to assist them in attracting top personnel. Alternatively, they might award RSUs to employees every year to recognise long service or when the business hits a certain performance-related goal or milestone.
The important point is that RSUs are not worth money when they are awarded. A predetermined amount of time, referred to as the "vesting period," will pass before the RSU converts to actual stock that can be sold for a profit. There will most likely be tax ramifications when RSUs are sold. In this case, it is important to understand how the nation's tax rules will impact you.
What are the Restrictions on RSUs?
In India, RSUs may be subject to several restrictions that lengthen their vesting duration. The many kinds of RSU limits are listed below:
Time-based limitations: RSUs are frequently given out by the business as a thank you for their allegiance. As a result, the employee's choice to stay with the company for a predetermined amount of time may impose limitations on the RSU vesting period.
Milestone-based restrictions: Some limits are contingent on the employee reaching a predefined milestone in addition to the time-bound ones. The vesting term on the RSU finishes when the employee reaches the specified milestone. For instance, once a salesperson reaches a specific sales goal, they can unlock the restriction on RSU.
Time-based and milestone-based restrictions: RSU limitations may occasionally be based on both time and milestone. This implies that to unlock the RSU limits, the employee must meet a performance milestone as well as a time limit.
Example of RSU
Assume that A, a worker, gets offered 3,000 business shares as RSU. According to the vesting plan, after he completes one year with his employer and one lakh sales, he will receive 1,000 shares annually for three years.
The vesting circumstances in this instance are:
One year of service completion (and)
Reaching the one-lakh sales milestone
He will begin receiving the stocks in accordance with the vesting schedule after fulfilling these two requirements. The vesting schedule in this instance is as follows:
Vesting Schedule
| Number of Shares
|
End of year 1 | 1,000 |
End of year 2 | 1,000 |
End of year 3 | 1,000 |
Advantages of Restricted Stock Units
Restricted Stock Units (RSUs) provide several benefits to a company's employees and employers. Some significant benefits to consider are as follows:
Retention of Employees: RSUs fuel long-term commitment in employees by providing an incentive to remain with the company for a longer period.
Boosting Morale: RSUs improve employee morale and inspire people to give their best work, which helps to create a positive work environment.
Opportunities for Capital Gains: Those who hold onto RSUs until the entire allocation is received have the chance to earn capital gains, provided that the company's stock value has increased over time, less any deductions for income tax obligations.
Cost-effective Monitoring: Since RSUs are notional in nature, they do not need businesses to spend significant costs for recording and tracking, in contrast to actual stocks.
Through these advantages, RSUs can match the interests of workers with the success of the business as a whole and help to increase employee retention and satisfaction.
Disadvantages of Restricted Stock Units
RSUs, or restricted stock units, have benefits, but they can have drawbacks. Here are some drawbacks to consider:
Lack of Dividend Distributions: RSUs do not actually represent real ownership in the corporation. Instead, they represent notional shares. Therefore, dividend payments are not due to the holder.
The risk of forfeiture: An employee forfeits any remaining unvested RSUs if they leave the company before the vesting schedule is finished. For example, Ravi would lose the remaining 500 shares if he quit after three years, even though he was supposed to get 2000 RSUs over four years.
Limited Ability to Change Finances: Unless certain requirements are fulfilled, RSUs cannot be used in times of financial necessity. Employees are unable to depend on RSUs for prompt financial support in times of need because of this lack of liquidity.
Taxation of RSU in India
In India, RSUs have tax implications at two different times. These are:
Upon RSU vesting
RSU is for sale
The RSU tax is computed at the time of vesting as well as when the employee sells their assets. Below is a detailed explanation of the tax effects.
Tax Implications of RSU on Vesting
Employees truly get ownership rights to the shares upon vesting of RSUs. It is regarded as a perk, a portion of the salary for the financial year in which it is invested. As a result, slab rates apply to it. For tax purposes, the units' fair market value of the restricted stock must be taken into account. The fair market value is the price at which these shares are offered for sale on the stock exchange on the vesting date. Employees who receive shares of a foreign business will also be subject to the currency exchange rate on the vesting date. In this context, there are three possible outcomes:
Selling to Cover: The employer has to subtract TDS u/s 192 from the fair market value when the stocks are sold after vesting. Assuming that A, who is in the 30% tax slab, receives 1,000 shares in the first year, we can return to the earlier scenario. On his behalf, the company will now sell 300 shares, or 30% of 1,000 shares, with the proceeds going towards tax payments. A will receive 700 net shares.
Same-day transaction: It indicates that every share that will be given to workers at vesting is sold off on the same day. Employees get the remaining money, while the government gets the corresponding tax value. An employee using this strategy receives the cash equivalent of the company's sales proceeds rather than actual shares.
Advance payment: If the employee selects this option, they will assume ownership of all the shares and pay the applicable tax value.
Sales revenues from RSUs are shown on Forms 16 and 12BA. The total number of shares that are vested will be included, not the number of shares that the employer credited to the employee's account.
Tax Implications on the Sale of RSU
Any profit acquired by an employee through the sale of their RSU holdings is regarded as a capital gain. During the holding period, the capital gain is subject to taxation. It does not matter if such shares are listed on the Indian stock exchange; the tax still applies. The holding period for RSU begins from the employee's date of vesting and lasts till the employee sells those shares. We've talked about the tax rate below:
Parameter
|
Listed Shares (on Indian Stock Exchange)
|
Unlisted Shares (on Indian Stock Exchange)
|
For shares held for less than 12 months, 20% tax on gains (15% if sold prior to 23rd July, 2024) | For shares held for less than 24 months, gains are taxable according to the slab rate. | |
For shares held for more than 12 months, 12.5% tax on gains (10% if sold prior to 23rd July, 2024) | For shares are held for over 24 months, gains are taxable at 12.5% | |
Exemption | LTCG of up to Rs. 1.25 lakh is tax-exempt. | No exemption |
No | Yes, in the case of LTCG |
Factors in RSU Taxation
Residency status: In India, your income is subject to taxation based on your status of residence. If you are a resident of India, you must pay Indian taxes on all of your income. It is regardless of where you live. However, you are exempt from paying taxes in India if you are a resident or non-resident who does not normally dwell in the country, and you have sold your shares or exercised your options outside of it. Determining residential status becomes essential.
Disclosures: Income tax return forms for assets from abroad now include various forms of disclosures. You could be required to report your overseas interests under Schedule FA of your income tax return if you own ESOPs or RSUs of a foreign company. Residents are subject to certain disclosure requirements.
When alternatives are not used: The employee has the option to purchase stocks or exercise his option on the vesting date. However, the employee is under no duty to execute his option. There will not be any tax ramifications for the employee in this situation.
Conclusion
Receiving a foreign company's RSU requires you to report it on the Foreign Asset Schedule (FAS). You can get this schedule on forms ITR-2 and ITR-3. Shares that were sold to pay taxes at vesting would not be listed in FAS. You only pay taxes on the profit when you sell your RSU holdings, not the whole share price. Avoiding double taxation is another benefit of this.
Frequently Asked Questions
What is RSU in Salary?
In many businesses, the stock component plays a significant role in salary as well. Depending on whether the corporation is listed on the stock exchange or not, this can include RSUs, equity shares of the company, and ESOPs.
Is RSU taxed in India?
The same taxes are applicable to RSUs as other equity shares in the country. The fair market value of the shares is also considered for the RSUs. For instance, your RSU is worth Rs. 20 * 100, or Rs. 2000, if the agreement specifies that one RSU of the corporation is equivalent to one share and the RSU's current market price is Rs. 20.
Can a capital gain exemption be claimed on the sale of RSUs?
Yes. Section 54F allows you to claim an exemption if the money you make from the sale of such an RSU is used to buy a new residential home (subject to a condition).
How do I claim DTAA relief if I have exercised RSU and tax has been deducted by my U.S. employer?
If you are not a U.S. resident, any federal taxes (income tax) will not be levied at the time of exercise or sale (capital gain). The "sell to cover transactions" method is represented by the amount that is subtracted from what you see. The employer will sell a portion of the allocated equities to cover your Indian income tax. Your employer would have received the amount that was withheld and used it to cover the TDS, so DTAA will not be applicable because there is no double taxation.
Is the value of RSU included in my CTC?
Yes, your CTC will include the RSU value. It is crucial to keep this in mind when examining your pay structure because the RSU component will not be included in your take-home pay and will be granted or vested over time.
I have received dividend income on my RSU, and my U.S. employer deducted 25% tax. How to treat this in the Indian ITR?
The dividends paid by the U.S.A. companies are levied a 25% federal tax. You also need to mention this dividend income in your ITR because worldwide income is taxable in India for Indian tax residents. Section 90 of Article 10 of the India-U.S. Treaty allows you to request a remedy. DTAA is applicable to taxes that you have previously paid in the US. Before filing your ITR, you must submit Form 67 to receive the credit.
Which exchange rate is appliable to conversion from USD to INR for the sale of shared listed in the USA?
The last day of the month before the capital gain is realised is how the exchange rate is determined by Rule 115 of the Income Tax Regulation. For instance, you must use the exchange rate as of February 29, 2024, if you sold shares on March 15, 2024. The value will be converted to Indian rupees by multiplying the exchange rate by the capital gain (in US dollars).
What is the vesting period of RSU?
The time frame in which an employee meets the vesting requirement is known as the vesting period. Employees can exercise their right once the vesting period is over.
Do I need to declare my unvested stock in Schedule FA?
No, an unvested stock option indicates that you have not yet met the vesting requirement and that equity shares have not yet been distributed. You do not need to report any equity shares in Schedule FA's Financial Equity or Debt Interest sections because you do not own any.
What is the difference between stock options and RSU?
RSU and stock options are both forms of equity compensation given to employees, albeit they differ slightly. The price is a significant difference. Employees at RSU receive Regular Stock options at a discounted rate, and Restricted Stock Units are provided free of charge.
How to declare RSU in ITR?
An employee must report RSUs received from a foreign corporation using forms ITR-2 or ITR-3 under the Foreign Asset Schedule. RSUs in Indian stocks, on the other hand, do not have to be declared until they are vested because they are not regarded as assets until then.
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