RSU or Restricted Stock Units are shares of the company given to employees free of cost but with some restrictions. What are RSUs? Why are RSUs given? What is the vesting date? When are RSU taxed? Is there a capital gain on selling RSU? What is the capital gain from selling RSU? We shall answer these questions by talking about the RSU of an American MNC.
Table of Contents
Overview of RSU, Tax, and ITR
RSU or Restricted Stock Units are shares of the company given to employee free of cost but with some restrictions(as the name suggests)
- On Granting of RSU no tax implication. It is just a promise by the employer
- On the vesting day, the given percentage of RSUs are transferred to employee’s trading account.
- Employee has to pay tax based on his income slab.
- the value of shares is considered as Perquiste in India and appears in Form 16. The market value of the shares vested (number of shares vested x Fair Market price X Conversion from Dollar to Indian Rupee) is added to the employee’s taxable income as perquisites. The price at which Stock is given to you is called as the Fair Market Value
- Tax might be deducted in the other country.
- US MNCs with employees in India generally submit W-8BEN to US brokers to avoid any withholding related to US taxes.
- Indian companies deduct % of shares as tax.
- There is no double taxation as tax is paid from the sale of shares.
- One needs to declare shares received as RSU as Capital Asset in Schedule FA(Foreign Assets) of ITR2, ITR3, ITR4.
- ITR1 does NOT have the schedule for Foreign Assets. So if you RSU, ESPP in MNC you cannot file ITR1.
- You should fill in information about all the RSUs you have as of 31 Mar of the financial year and the income you derived from it(Dividend, Capital Gains).
- If tax for RSU has been deducted by selling of shares, Number of shares mentioned should be after the deduction. So if 100 shares got vested and 30 shares were deducted then you need to show only 70 shares in Foreign Assets.
- One can only sell the RSUs that are vested. On the sale of the vested shares, the profit earned is a capital gain and is therefore taxable in India.
- For RSUs, the difference between the vesting price or the Fair Market Value and the sale price is the as capital gain
- For RSUs, the acquisition date is the vesting date.
- As the RSUs of the MNCs are not listed on the Indian stock exchange and no STT(Security Transaction Tax) is paid so the definition of a long term and short-term capital gains is different from the shares listed on Indian stock exchange like BSE and NSE.
- Short-term capital assets – when sold within 24 months of holding them. Short-term gains are taxed at employee’s income tax slab rates
- Long-term capital assets – when sold after 24 months of holding them. Long-term gains are taxed at 20% with indexation
- This capital gain must be declared in Schedule CG of ITR2 ITR3, ITR4 for tax purposes.
- Advance Tax should be paid for profit/capital gain of more than 10,000 Rs.
The reporting would be as below for foreign stocks on
- Schedule CG for Capital gain on Sale of Shares
- Schedule OS for Dividend income
- Schedule FSI and Schedule TR for claiming the foreign tax credit in case of double taxation relief
- Schedule FA: Details of holding of foreign shares/securities
RSU or Restricted Stock Units
RSU or Restricted Stock Units are shares of the company given to employee free of cost but with some restrictions(as the name suggests). The restriction is that though an employee is granted RSUs on a specific day (such as when he joins a company or gets a promotion) he gets ownership of the shares over a period of time. It is an incentive to the employee to stay in the company and to profit from the growth of the company. When the shares are awarded to the employee according to the schedule, it is considered as perquisite income and added to regular income. When one sells the RSUs one capital gain comes into play and one may have to pay tax depending on the period of holding of RSU. Terms associated with RSU.
- Grant date: The date on which the shares are allotted
- Vesting date: the date on which the shares get transferred to the employee.
Say if one is granted 100 RSUs to be vested over 3 years in the ratio 34%/33%/33% on 23 Nov 2013. Then 34 RSUs (34%) will vest on 23 Nov 2014 and 33 each (33%) on 23 Nov 2015 and 23 Nov 2016 respectively. If you leave the company on 1 December 2015, then you will be able to sell only 34 shares and the remaining 66 shares will go back to the company. If you stick around for another month, then you will be able to sell 67 shares (34 + 33) as another 33 shares will vest on 23 Nov 2015.
So if one is granted 100 RSUs to be vested over 4 years in the ratio 25%/25%/25%/25% on 16 Dec 2013. Then 25% of RSUs i.e 25 stocks of the company will vest on 16 Dec 2014, on 16 Dec 2015, 16 Dec 2016 and 16 Dec 2017 respectively. (If the vesting day is holiday then the stocks vest on next working day)
The other kind of incentives offered by the companies are ESPP and ESOP.
Our article What are Employee Stock Options (ESOP) explains ESOP in detail.
Our article Employee Stock Purchase Plan or ESPP explains ESPP in detail.
Tax when RSUs are Granted
On Granting of RSU no tax implication. It is just a promise by the employer.
Tax when RSUs are Vested
Vesting date is the date on which the predefined percentage of shares get transferred to the employee according to the predefined schedule. Say one is granted 100 RSUs to be vested over 4 years in the ratio 25%/25%/25%/25% on 16 Dec 2013. Then 25% of RSUs i.e 25 stocks of the company will vest on 16 Dec 2014. On the vesting day, the given percentage of RSUs are transferred to employee’s trading account, for example, eTrade or Charles Schwab account for an American MNC. On Vesting, one has to take care of following things
- one has to pay tax based on income slab.
- the value of shares is considered as income in India.
Tax on RSU
Companies are obligated to deduct taxes for RSUs vested. The most common method of deducting tax is share withholding, where the company withholds enough shares to cover the tax liability and deposits net shares to your brokerage account. This option is called as Sell to cover. Some companies permit other methods, such as cash or sell-to-cover transactions, which are explained below. Different methods may be supported by trading companies like Schwab or eTrade, but only the methods authorized by your company will be available to you.
The various options to deduct tax on broking site where the RSUs are held are as follows:
- A sell-to-cover This is the default option where TDS (as per your income slab) percentage of the vested shares are sold immediately and the amount is paid to the government as tax. The remaining 70% of the vested shares remain in your account and you can sell them later whenever you want. Actully tax deducted is as per the income slab but as in most of the companies, the RSUs are offered above a certain level where income comes in 30% income slab.
- A same-day sale: All the vested RSUs are sold immediately. Percentage of the sale proceeds are deducted and paid as tax to the government and the rest of money gets wired to your account. You don’t any shares after this.
- A cash exercise allows you to pay the tax and no shares are sold. The money to pay must be available in your brokerage account.
The default option is Sell to Cover hence If 70 RSUs are vested then you would get only 49 stocks in your account due to taxation. 30% of 70 = 21 which is taken as tax. So no of shares in the account becomes 70-21=49.
RSUs as Perquisite Income in India
For RSUs, the acquisition price or purchase price is zero and so the entire market value of vested shares is treated as income in India as a perquisite. The market value of the shares vested (number of shares vested x Fair Market price X Conversion from Dollar to Indian Rupee) is added to the employee’s taxable income as perquisites. The price at which Stock is given to you is called as the Fair Market Value. All the shares that are vested are used to calculate the Perquiste Income which includes the stocks which were sold for tax. if 70 RSUs are vested then you would get only 49 stocks in your account due to taxation but all the 70 shares will be used to calculate the perquiste income.
It is declared in his Form 12BA for the year and is available in your Form 16, as shown in the images below. The Indian company adds it to employee’s Income and charges Tax accordingly.
Our article Understanding Form 12BA give details of Perquisites given to an employee in detail.
Our article Understanding Form 16: Tax on income explains the Form 16. Income Tax Form 16 is a certificate from the employer which certifies that TDS has been deducted from employee’s salary by the employe
Are RSU’s Taxed Twice?
Short Answer is RSU’s are not taxed twice. If they would have been taxed twice you would have Govt document of the country deducting tax saying that tax has been deducted. Like Form 16/Form 16A provided by Indian Govt or Form 1042-S provided by US when the tax is deducted on the dividend of US compnaies.
An employee (Resident Indian) working in India in a subsidiary of a US Company is given RSU or Restricted Stock Units of the parent company.
When the stocks are vested, some stocks are withheld (Sell to cover) to meet tax liability in US and after reducing these stocks, the balance is given to the employee.
Indian company also calculates prerequisite based on FMV on the total number of stocks including withheld stocks and TDS is deducted. This is reflected in Form 16 partB.
So are RSUs are taxed twice. About 65.22% value is consumed in tax.
Is double taxation done by the company is correct?
Can DTAA benefits be availed for a refund?
No, RSUs are not taxed twice is what my company says. Just because you are seeing that in your Form 16 and your brokers statements, it doesn’t mean that its been deducted twice.
In the example above, Reader Smriti explained beautifully.
100* FMV was added to your prerequisite to show it as a part of income. it just means you were paid a 100*FMV amount by the company( in form of stocks).
66 stocks are deposited to your brokerage account.
The remaining stocks (100-66 = 34) are considered to be sold by the broker on your behalf and the amount obtained from this is paid as tax.
All these calculations are part of your salary prerequisite and hence, will show in your salary slip as the tax you are paying to Govt of India.
The employer is not deducting tax twice. it’s just adding all the details in the payslip.
We have heard that Proof is in the pudding or show me the proof. If the tax had been deducted by the foreign company then they need to provide documents like Form 16/Form 16A in India and Form 1042-S in the US. The Sample Form 1042-S from our article How are Dividends of International or Foreign Stocks taxed? How to show in ITR is shown below.
Dividend income from foreign stocks
Dividend income earned from foreign stocks is taxed as per Income Tax slabs under the head Income from Other Sources.
In Schedule TR, you need to provide a summary of tax relief that is being claimed in India for taxes paid outside India in respect of each country. This schedule captures a summary of detailed information furnished in Schedule FSI.
In the case of certain ESOPs, an individual may also receive dividend-equivalent income on unvested shares. These are generally taxed as part of salary income.To determine one’s taxation it is advisable to have a talk with your Employer or colleagues.
The Double Taxation Avoidance Agreement or DTAA is a tax treaty signed between India and another country so that taxpayers can avoid paying double taxes on their income earned from the source country as well as the residence country. At present, India has double tax avoidance treaties with more than 80 countries around the world.
How to show RSU, ESPP, and Foreign Assets in ITR
One needs to show shares received as RSU(ESPP/ESOP) as Capital Asset in Schedule FA(Foreign Assets) of ITR other than ITR1 such as ITR2, ITR3, ITR4 as shown in the image below. ITR1 does NOT have the schedule for Foreign Assets.
The image below shows the case of only when shares of a company in the US were allotted to the employee and the employee has not sold them till filing of the income tax return. To fill this please go through Perquisite on Stock Options report and the break up provided by your employer on stocks allotted to you.
If tax for RSU has been deducted by selling of shares, the Number of shares mentioned should be after the deduction. So if 100 shares got vested and 30 shares were deducted then you need to show only 70 shares in Foreign Assets. Total Investment values is the Number of shares in your account X Fair Market Value X US dollar stock price.
If you have got RSU at different times and you haven’t sold them then details about each allotment you had till 31 Mar of the financial year for which you are filing ITR has to be put in the Foreign Assets table.
For example, your 70 RSUs got vested in 2020 and 70 in 2021, the information about both the allotments should be in Foreign Assets.
Schedule for Foreign Income in ITR
Difference between Schedule Foreign Source Income (FSI) and Foreign Assets (FA)
Is Schedule FSI required to be filled in ITR2?
I am resident in India. I have been allotted stock options (of my parent US company), which have been shown in my Form 16. Do I also need to show this income in Schedule FSI or Schedule FA (Foreign Assets)? No Tax has been deducted in the US and I am not claiming any refund.
- In Schedule Foreign Source Income (FSI), you need to report the details of income, which is accruing or arising from any source outside India. FSI schedule is mandatory for residents who earned income from outside India and tax paid outside India and to claim the benefit of DTAA on such income.
How to select the Schedules?
Go to Schedule Selection
- Click Income to see the Income from Capital Gains Schedule. Select the Schedule
- Click Income to see the Foreign Source Income schedule. Select the Schedule
- Click Others to see the Foreign Assets Income schedule. Select the Schedule
Details to be filled in Foreign Asset schedule in ITR2
Details to be filled are:
- Country Name and code: The Country where the exchange on which stocks are listed is traded. Ex for someone working in Amazon or Microsoft, it would be the USA. Code is available in the dropdown in ITR.
- Nature of asset: Shares
- Nature of Interest-Direct/Beneficial/owner/Beneficiary: Direct
- Date of acquisition: Date on which stocks were allotted
- Total Investment (at cost) (in rupees): Price at which RSU/ESPP was allotted. (Please deduct the number of shares that were credited to your account after-tax deduction. Say you were allotted 70 shares but because of tax only 49 stocks were credited into your broking account). In example 49*17.89(FMV)*62.90(USD Exchange rate)
- Income accrued from such :
- 0, if you haven’t sold the shares.
- If you have earned a dividend then declare the dividend received.
- If you have sold the shares then you have to show the profit/loss received from the sale of the shares.
- Nature of Income: What type of Income it is. For Foreign stocks not sold it is Income from Salary. For Foreign stocks sold it is income from Capital Gains.
Table A3 or Table D
You can declare it in Table A3 or Table D of Foreign Assets as shown in the images below
Technically it should be declared in Table A3. Extra details required in Table A3 are the Peak Value of investment during the period, Closing Value. Closing Value should be as of 31 Mar. These details you can find from your broker.
In table A3, the initial value of the investment, the peak value of the investment during the accounting period, the closing value of the investment as at the end of the accounting period, gross interest paid, the total gross amount paid or credited to the account during the accounting period,and total gross proceeds from sale or redemption of investment during the accounting period is required to be disclosed after converting the same into Indian currency
But as it requires more details, many people do it in Table D, the rationale being we are declaring the income and account for it.
Table A3 and Table D in the old ITR
Our article Are ESPP, ESOP in MNC to be filed in ITR as Foreign Assets? discusses What are foreign assets? The Foreign Asset schedule in ITR2.
Tax On Sale of RSU
One can only sell the RSUs that are vested. On the sale of the vested shares, the profit earned is a capital gain and is therefore taxable in India.
For RSUs, the difference between the vesting price or the Fair Market Value and the sale price is the capital gains.
As the RSUs of the MNCs are not listed on the Indian stock exchange and no STT(Security Transaction Tax) is paid so the definition of a long term and short-term capital gains is different from the shares listed on Indian stock exchange like BSE and NSE.
From FY 2016-17 i,e for the sale of unlisted shares on or after 1st April 2016 UNLISTED equity shares is given below. This capital gain must be declared in Schedule CG of ITR so that tax may be suitably charged
- short-term capital assets – when sold within 24 months of holding them. Short-term gains are taxed at employee’s income tax slab rates
- long-term capital assets – when sold after 24 months of holding them. Long-term gains are taxed at 20% with indexation (so section 48 which uses Indexation applies)
The income tax Act in India act differentiates between the tax on capital gains of listed and unlisted shares.
- Listed shares are those that are listed on Indian stock exchanges, such as TCS, HDFC Bank, etc.
- Unlisted shares are those that are not listed on Indian exchanges, regardless of whether they are of Indian companies or foreign companies listed on foreign exchanges such as Google, Microsoft, Apple, etc.
The tax treatment on capital gains that are unlisted in India or listed out of India is the same. So if you own shares of an American company, this company is not listed in India, hence it is considered unlisted for the purpose of taxes in India.
The period of holding begins from the vesting date up to the date of sale
The table below shows the example of Short Term Capital Gain and Long-term Capital Gain
|At the time of||Units||Date||FMV of share(USD)||Tax to be paid||In income tax return|
|Grant||240||12-Dec-13||Not Applicable||nil||Not Applicable|
1 USD = 62.90 Rs
CII of year 240
|Tax of 30% taken by selling 21 shares
Income Tax = 70 * 17.89* 62.90=78770
|Perquiste Income as Income from Salary.
Taxed as per employee’s Income Tax Slab Rate
|Sale of shares if unlisted||20||31-Jul-15|| 20.96
1 USD = 63.60 Rs
|Short Term Capital Gain= 20* ((63.60*20.96)-(62.90* 17.89))= Rs 4,155.5||Under Capital Gains (short term capital gains)
Taxed as per Income Tax slab of employee
|Sale of shares if unlisted||25||31-Jan-17||25.89
1USD = 67.15
CII of the year 264
|Indexed purchased cost = 62.90 * 264/240 = 69.19
Long-Term Capital Gain with indexation= 25*((67.15 * 25.890)-(69.19* 17.89)) =
=25* (1738.5135 -1237.8091) = 25*500.7044=12517.61
Long-Term Capital Gain tax(with indexation) = 20% of 12517.61=2503.522
|Under Capital Gains (long term capital gains)
Long-Term Capital Gain without indexation= 25*((67.15 * 25.890)-(62.90* 17.89)) = 15330.8125
Long-Term Capital Gain tax(without indexation) = 20% of 15,330.8125=3066.1625
What if there is loss on selling shares? Thankfully Income Tax Department gives benefit of Setting of Capital Loss.
Set-Off Losses means adjusting the loss against the taxable income earned; after that, remaining the loss can be carried forward to future years.
The taxpayer cannot carry forward losses to future years if the income tax return for the year in which loss is incurred is not filed on the Income Tax Website within the due date as per Sec 139(1).
If one has Short term capital loss, then it can be set off against short-term or long-term capital gain from any capital asset(real estate, gold, debt mutual funds).
If the loss is not set off entirely, then it can be carried forward for a period of 8 years and adjusted against any short-term or long-term capital gains made during these 8 years. But only if he has filed his income tax return within the due date.
Showing Capital Gains in ITR
Part A of the Capital Gains Schedule provides for computation of short‐term capital gains (STCG) from the sale of different types of capital assets. Out of this, item No. A3 and A4 are applicable only for non‐residents.
Part B of this Capital Gains Schedule provides for the computation of long‐term capital gains (LTCG) from the sale of different types of capital assets. Out of this, item No. B5, B6, B7, and B8 are applicable only for non‐residents
Choose the Schedule Capital Gains
In Capital Gain Schedule for sale of shares of MNC not listed on Indian Stock Exchange choose Sale of Assets other than listed. (in addition to any other capital gain you would have)
Then Choose Short Term Gain/Long Term Gain
- Short Term Gain if you held shares for less than 24 months
- Long Term Gain if you held shares for more than 24 months
The new ITR Utility shows the details that need to be filled for Capital Gains
Capital Gains in Old ITR
Setting of the Capital Loss
If you have a capital loss then in summary you would see the loss an example of which is shown in the image below. If there is a Capital Loss, it would be reflected as a negative value
Click on Schedule CYLA (Current Year Losses Adjustments). The details entered in Capital Gain Schedules will reflect in Set-Off/ Carry Forward Schedules.
Note: Set off & carry Forward Schedules will fetch data from Capital gain Schedule. The taxpayer need not enter the details again in these schedules.
Click on Schedule CFL (Carry Forward Losses)
The unadjusted losses of that financial year will be carried forward.
In the following years ITR you can adjust your capital gains against this loss and reduce your tax liability.
DTAA and RSU
Double taxation refers to the situation when an individual is taxed more than once on the same income, asset or financial transaction.The Double Tax Avoidance Agreements (DTAA) is bilateral agreements entered into between two countries, in our case, between India and another foreign state. The basic objective is to avoid, taxation of income in both the countries (i.e. Double taxation of same income) and to promote and foster economic trade and investment between the two countries.
US MNCs with employees in India generally submit W-8BEN to US brokers to avoid any withholding related to US taxes. However, the taxes etc are deducted for the employees in India. These are reported in perquisites form. (as explained above). The image below shows how one has to certify W-8BEN form on ETrade for US. More details in the video here.
If any tax is deducted in US then US IRS department will send Form similar to Form 16 to your address.
Advance Tax on Capital Gain of RSU
Advance Tax rules require that one’s tax dues (estimated for the whole year) must be paid in advance. Advance tax is paid in installments. While the employer deducts TDS when your RSUs get vested, one may have to deposit advance tax if one earns capital gains.
Non-payment or delayed payment of advance tax results in penal interest under sections 234B and 234C.
You need to pay Advance Tax on RSUs only when you sell the RSUs and the profit is more than 10,000 Rs. You need to pay an appropriate percentage of it before the nearest due date. So if you sold between 16 June and 15 Sep you need to pay 45% before 15 Sep.
|Due Date||Advance Tax Payable|
|On or before 15th June||15% of advance tax less advance tax already paid|
|On or before 15th September||45% of advance tax less advance tax already paid|
|On or before 15th December||75% of advance tax less advance tax already paid|
|On or before 15th March||100% of advance tax less advance tax already paid|
However, it may be hard to estimate tax on capital gains and deposit advance tax in the first few installments if a sale took place later in the year. Therefore when advance tax installments are being paid, no penal interest is charged where installment is short due to capital gains. Remaining installment (after the sale of shares) of advance tax whenever due must include the tax on capital gains.
Depending on the time duration between the vesting date and the sale date, the profit can either qualify for short-term or long-term capital gains tax. For RSUs, the acquisition date is the vesting date.
Our article Advance Tax:Details-What, How, Why is about Advance Tax for individuals.
Disclaimer: This information is for educational purposes only. We have tried to provide the information to the best of our ability. But please consult your CA, tax consultant. Bemoneyaware.com is not responsible for any liability on information provided on the site.
- Salary, Net Salary, Gross Salary, Cost to Company: What is the difference
- Salary, Allowances, Dearness Allowance, Government Salary, Pay Commission
- Understanding Variable Pay
- Understanding Form 16: Part I
- How To Fill Salary Details in ITR2, ITR1
- HRA Exemption, Calculation, Tax, and Income Tax Return
- How are Dividends of International or Foreign Stocks taxed? How to show in ITR
Hope this article helped in understanding What are RSUs? Why are RSUs given? What is the vesting date? When are RSU taxed? Is there a capital gain on selling RSU? What is the capital gain from selling RSU? How to show these in ITR