RSU stands for Restricted Stock Units. The company issues these shares to its employees after they meet certain conditions, such as meeting performance goals or completing vesting.
However, due to factors such as international tax treaties, domestic tax laws, residency status, and more, RSU taxation can be complex. It is vital for Indian employees who receive RSUs from foreign companies to understand their tax implications, as they are taxable in India.
This write-up explains in detail everything about the RSUs and their tax implications in India. So read on and gather all the information.
Key Takeaways
- RSUs are not taxed when granted; tax implications are imposed when they are vested.
- On vesting, RSUs are taxed under the head of income from salary.
- Depending on the capital gain basis, i.e, STCG or LTCG, tax is imposed on the sale of RSUs.
- If you have RSU of a US company, you should disclose it under the Schedule FA when filing your ITR to get the DTAA benefits.
- When you sell the RSU, the tax is imposed on the profit amount, not on the whole amount of shares.
What are Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are a type of employee benefit or compensation that a company issues to its employees. Based on their performance goals and vesting, employees receive these stocks.
Further, unlike stocks, where employees have the right to purchase the shares, under RSUs, they receive actual shares once they meet the vesting conditions.
Here, vesting conditions are criteria that a company fixes for its employees. Considering this, upon the fulfillment of the criteria, the employee receives RSUs.
This was all about restricted stock units (RSUs). Moving ahead, let's know how these are taxed in India.
Taxation of RSU in India
No tax liability is imposed when the RSUs are on grant. It is because at that time, employees do not hold them. Considering this, there are two stages in which RSUs are taxed in India. These are the vesting and sale of RSU. Further, both the tax implications are explained in detail below.
Tax Implications on Vesting
On vesting, RSUs are treated as perquisite income and under the "income from salary" head, they are taxed. Considering this:
- The Fair Market Value (FMV) of the shares on the vesting date is considered part of the salary. Further, these are taxed as per the income tax slab rate of the employee.
- Additionally, the TDS is deducted from the perquisite income by the Indian employer and deposited into the income tax department.
Tax Implications at Sale
When the vested RSUs are sold by the employees, capital gain tax is imposed on them. It is calculated on the following basis:
- Short-Term Capital Gains (STCG): If the RSUs are sold within 24 months, the capital gains are taxed at the income tax slab rate of the individual.
- Long-Term Capital Gains (LTCG): If the RSUs are held for more than 2 years (24 months), the capital gains are taxed at 12.5%. However, it does not include the indexation benefits.
Further, tax is imposed on the amount of profit you receive after the sale of RSU, not on the entire value of it.
This is how taxation on RSUs is imposed in India. Further, the taxation of foreign RSUs in India also depends on the residency status of the employee. If the person is an Indian resident, his/her global income is taxable. This involves both the value of the RSUs when vested and sold.
However, if the person is an NRI or RNOR, RSUs vesting associated with their overseas job will not be taxable in India. Additionally, unless the sale consideration is received in the Indian bank account, the sale of RSUs outside India will also not be taxable here.
Moving further, let's know if the US RSU is taxable in India.
Is U.S. RSU Taxable in India?
Yes, if an Indian resident holds the RSUs they received from a US company, these are taxable in India during vesting and sale. Considering this, when an Indian employee receives dividends from a US company, at 25% federal they are taxed in the US.
Further, to avoid paying tax twice on the same income, Indian residents should include it in their ITR when paying tax on their global income. Under section 90 of the DTAA between India-USA they can claim a foreign tax credit. Through this, they avoid paying taxes twice on the same income they paid abroad.
Additionally, to claim the tax credit, they also need to fill out Form 67. Also, in the Schedule TR section of the ITR, the details of the claimed tax relief should be mentioned for taxes paid outside.
So, yes, from the above information, the US RSUs are taxable in India if they are held by an Indian resident. However, if they have already paid taxes on them in the US, they can claim a tax credit under the DTAA signed between India-USA.
Now, moving ahead, let's know how to report RSUs in ITR.
How to Report RSUs in ITR?
Here is how you have to report RSUs in the ITR:
- Under the Schedule Capital Gains (CG), report the RSU in your income tax return.
- In Form 16, the perquisite value is stated, and should be accounted for while filing tax returns.
- Under Schedule FA (Foreign Assets), RSU holdings in foreign RSU accounts should be mentioned in ITR-2 or ITR-3.
This is how you can report RSU in the ITR. Moving further, let's know why it is important to declare your Foreign RSUs and shares when filing a tax return.
Why It is Vital to Declare Your Foreign RSUs and Shares During Tax Filing?
It is vital to declare your foreign RSUs and shares during your tax filing in Schedule FA (Foreign Assets) because failing to do so leads to several consequences. These include:
- According to the Black Money Act, 2015, not mentioning your foreign assets or RSUs in the relevant ITR imposes a penalty of INR 10,00,000. In this scenario, even the value of an asset located outside the country is not considered.
- Additionally, under the Black Money Act, 2015, prosecution may also be involved in it. If it happens, a person faces imprisonment of a minimum of six months, which can be extended to seven years.
- Apart from this, you will also not be able to claim the DTAA benefits that potentially result in double taxation on the same income in two different countries.
So, this is why it is vital to declare your foreign RSUs and shares during tax filing.
Final Thoughts
Lastly, this was all about RSU taxation in India. For Indian residents who have RSUs from US companies, at both stages, the vesting and sale, taxation occurs.
Further, understanding the tax implications of RSUs can be difficult, but with Savetaxs, everything seems easy. We have a team of professionals who have years of experience in this field and can help you in minimizing your tax liability and certify full compliance.
*Note: This guide is for informational purposes only. The views expressed in this guide are personal and do not constitute the views of Savetaxs. Savetaxs or the author will not be responsible for any direct or indirect loss incurred by the reader for taking any decision based on the information or the contents. It is advisable to consult either a CA, CS, CPA, or a professional tax expert from the Savetaxs team, as they are familiar with the current regulations and help you make accurate decisions and maintain accuracy throughout the whole process.
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