RSUs & ESOPs Tax Guide for Indian Employees
In today’s global job market, many Indian employees working with multinational companies like Google, Microsoft, Amazon, and Meta receive part of their salary in the form of RSUs (Restricted Stock Units) or ESOPs (Employee Stock Option Plans). These equity-based compensation tools are designed to attract and retain top talent while aligning employee performance with the company’s long-term goals.
While such stock-based benefits can be a great way to grow wealth, they also bring a series of tax and compliance challenges—especially for Indian residents. This article serves as a detailed, India-specific guide to help you understand how RSUs and ESOPs work, how they are taxed, what forms you need to file, and how to avoid common pitfalls such as double taxation or non-disclosure penalties.
Understanding the Basics: RSUs vs. ESOPs
Let’s start by clarifying the definitions.
- RSUs (Restricted Stock Units) are shares that a company grants to employees as part of their compensation. However, these shares do not become the employee’s property immediately. Instead, they are subject to a vesting schedule. Once vested, the employee becomes the legal owner of the shares.
- ESOPs (Employee Stock Option Plans), on the other hand, are options granted to employees, giving them the right (but not obligation) to buy company shares at a pre-defined price (called the exercise price) after a vesting period. These shares only become valuable if the company’s market value rises above the exercise price.
Both are used as incentives and long-term compensation tools, but they function quite differently in terms of ownership, taxability, and financial planning.
When Are RSUs Taxed?
One of the most important aspects of RSUs is their tax treatment in India. RSUs are not taxed at the time of grant. The tax is triggered at vesting—which is when the employee actually receives the right to own the shares.
On the vesting date, the Fair Market Value (FMV) of the vested shares is treated as a perquisite and added to the employee’s salary income. This is then taxed at the individual’s applicable slab rate.
For example, if you are in the 30% tax bracket and receive RSUs worth ₹10 lakh in a financial year, you will have to pay ₹3 lakh in tax—even if you don’t sell the shares. This amount is usually reflected in your Form 16 provided by your employer.
How Is the Tax Value Calculated?
The value of the RSU taxable at vesting is calculated as:
Taxable Perquisite Value = FMV on Vesting Date × Number of Shares Vested
This value is added to your total salary income. It’s important to cross-verify this with your company’s equity portal (such as Fidelity, E*TRADE, or Morgan Stanley) to ensure consistency.
Once vested, you own the shares, but any future appreciation in their value is not taxed until you actually sell the shares.
What Happens When You Sell RSUs? Capital Gains Tax
Once you sell the shares, you are liable for a second round of taxation—this time under capital gains tax. The capital gain is calculated as the difference between the sale price and the FMV at the time of vesting (which was already taxed as salary).
Capital Gain = Sale Price – FMV on Vesting Date
The classification of this gain as either short-term or long-term depends on how long you held the shares after vesting:
- Short-Term Capital Gains (STCG): If sold within 24 months of vesting, taxed as per your slab rate.
- Long-Term Capital Gains (LTCG): If held for more than 24 months, taxed at 20% with indexation benefit.
Let’s say your RSUs vested on January 1, 2024, at $150 per share, and you sold them on February 1, 2025, at $180 per share. Your capital gain per share is $30. If the total gain amounts to ₹3 lakh and the shares were held for more than 24 months, the tax payable is 20% of ₹3 lakh, which is ₹60,000.
Double Taxation: Withholding Tax in Foreign Country
A common complication with RSUs arises from double taxation. Foreign companies, especially those listed in the U.S., often withhold tax at the time of RSU vesting. This means a portion of the RSU value is deducted as tax in the country of the employer (e.g., the U.S.).
Unfortunately, the same income is also taxed in India as part of your salary. So, without careful planning, you may end up paying tax twice on the same income.
How to Avoid Double Taxation: Form 67 and Foreign Tax Credit
To prevent this, Indian tax law allows you to claim Foreign Tax Credit (FTC) for the tax already paid in another country. This is done by filing Form 67 on the Indian Income Tax portal.
Filing Form 67 is mandatory and must be done before filing your ITR. If you miss this step, you will not be allowed to claim the credit, and may end up paying the same tax twice.
The form requires documentation such as:
- Statement from the employer or broker showing foreign tax paid
- Details of RSU vesting and FMV
- Foreign country tax documents or payslips
Example to Illustrate the Process
Suppose 100 RSUs vest on 1-Jan-2024, and the FMV is $150 per share. That’s a total of $15,000 or approximately ₹12.5 lakh.
This ₹12.5 lakh is taxed as salary in FY 2023–24.
Now let’s say you sell those shares on 1-Feb-2025 at $180 per share. The capital gain is $30 per share, or ₹3 lakh in total.
Since the shares were held for over 12 months, but not 24, you may fall under STCG. If sold after 24 months, the gain is taxed at 20% with indexation.
Schedule FA – Disclosure of Foreign Assets
Even if you haven’t sold the shares or received any income, RSUs or ESOPs held in a foreign company are considered foreign assets under Indian tax law.
These must be reported in Schedule FA of your ITR. Non-disclosure can attract severe penalties under the Black Money Act, with fines up to ₹10 lakh.
Whether the shares are in the vesting stage, held after vesting, or exercised but not sold—you are required to disclose them.
Choosing the Right ITR Form
If you’ve received RSUs or ESOPs from a foreign company, you cannot use ITR-1. Instead:
- Use ITR-2 if you have only salary income and capital gains
- Use ITR-3 if you also have income from business or profession
Also, make sure to convert all foreign currency values using the SBI Telegraphic Transfer (TT) Buying Rate as of the relevant date. This rate is accepted by the Indian Income Tax Department and must be used for all currency conversions.
Taxation of ESOPs: How It Differs from RSUs
While RSUs are taxed at vesting, ESOPs are taxed at the time of exercise. When you decide to buy the shares under the ESOP plan, the difference between the FMV on the exercise date and the exercise price is treated as perquisite income.
This amount is taxed as part of your salary. Later, when the shares are sold, capital gains tax applies on the difference between the sale price and FMV on the date of exercise.
For example, if your exercise price is ₹800 and FMV on the exercise date is ₹1,200, you’ll be taxed on ₹400 per share as salary. If you sell later at ₹1,500, the capital gain is ₹300 per share.
FEMA and RBI Guidelines
Foreign equity received under RSUs and ESOPs is regulated by the Foreign Exchange Management Act (FEMA). The Reserve Bank of India allows Indian residents to hold foreign assets worth up to USD 250,000 per financial year under the Liberalised Remittance Scheme (LRS).
If you sell your foreign shares and repatriate the funds to India, you must ensure compliance with these limits and declare such transactions properly in your ITR.
Documentation and Tools You’ll Need
Managing equity compensation efficiently requires organized documentation. Keep the following ready:
- Access to your employer’s equity portal (e.g., Fidelity, E*TRADE)
- Form 16 showing salary and perquisite income
- Capital gains calculation reports
- SBI TT Buying Rate for relevant dates
- Form 67 filing acknowledgement
- Broker’s statement showing foreign tax withheld
- Form 10E (if claiming relief under section 89)
Common Mistakes to Avoid
Many employees unknowingly make the following errors:
- Reporting RSU income only when the shares are sold (instead of at vesting)
- Using ITR-1, which doesn’t allow foreign asset disclosure
- Not filing Form 67, resulting in loss of FTC
- Ignoring Schedule FA reporting
- Using unofficial exchange rates for conversion
These mistakes can lead to penalties, scrutiny, or rejection of tax credits.
Conclusion
RSUs and ESOPs offer fantastic opportunities to grow your wealth while working for global companies—but they come with a web of tax and compliance obligations. From understanding the difference between vesting and exercising, to correctly calculating capital gains, choosing the right ITR form, and filing Form 67 to claim foreign tax credits—every step requires attention to detail.If you’re an Indian employee dealing with RSUs or ESOPs from a foreign employer, don’t take tax filing lightly. One wrong move could mean penalties, delayed refunds, or even double taxation. For expert assistance and peace of mind, reach out to Witcorp Global Consultants L.L.C-FZ—your trusted partner for international tax compliance and equity compensation advisory.
