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Key takeaways
- A Restricted Stock Unit (RSU) is a form of equity compensation where the employer promises shares to the employee on a future date.
- At vesting, the Fair Market Value (FMV) of the shares is taxable as salary income under Section 17(2)(vi) of the Income Tax Act, 1961. The full FMV is taxable because RSUs carry no purchase price.
- The employer must deduct TDS under Section 192 on the vesting perquisite value of the RSU.
- For foreign-company RSUs that are taxable in India, the FMV must be converted to INR using the SBI TTBR on the vesting date, as prescribed under Rule 26 of the Income-tax Rules, 1962.
- At sale, capital gains tax applies to appreciation above the FMV at the time of vesting. For foreign company shares, treated as unlisted in India, the long-term threshold is 24 months and the LTCG rate is 12.5% under Section 112.
- ROR taxpayers holding foreign RSUs must file ITR-2 or ITR-3 and disclose foreign assets under Schedule FA. Schedule FA follows the calendar year, not the Indian financial year.
- TDS deferral available to startup ESOP holders does not extend to RSUs under the statute's current text.
A Restricted Stock Unit (RSU) is a commitment by an employer to deliver shares to an employee on a future date, once specified conditions are met. Those conditions are typically time-based (continued employment over a vesting period) or performance-based (tied to financial or operational milestones).
When the vesting conditions are satisfied, shares are delivered automatically into the employee's demat or brokerage account and a taxable event arises.
The tax lifecycle of an RSU in India
An RSU passes through three stages: grant, vesting, and sale. Tax liability arises at only two of them.
- At grant, no tax arises. The employee has received a conditional promise, not an asset, and the Income Tax Act, 1961 taxes the delivery of specified securities, not a contractual right to receive them in future.
- At vesting, shares are delivered and a perquisite (a non-monetary benefit received in addition to salary) is recognised under Section 17(2)(vi) of the Income Tax Act, 1961. The Fair Market Value (FMV) of the shares on the vesting date is added to the employee's taxable salary and taxed at their applicable income tax slab rate.
- At sale, the appreciation above FMV at vesting is taxed as capital gains. The type of capital gain depends on how long the employee has held the shares since the vesting date.
Stage 1: Vesting and perquisite tax
Statutory basis
When RSUs vest, Section 17(2)(vi) classifies the delivered shares as a perquisite. Since RSUs carry no purchase price, the entire FMV on the vesting date is taxable as salary income. This income is reported under the head "Salaries" in the employee's ITR and reflected in Form 16. For employees whose salary exceeds ₹1,50,000, the employer must also issue Form 12BA that includes a detailed itemised breakdown of all perquisites.
How FMV is determined
For shares listed on a recognised Indian stock exchange, FMV is calculated as the average of the opening and closing prices on the vesting date on the exchange with the highest trading volume. In case of shares of an unlisted Indian company, FMV must be determined by a Category I merchant banker as of the vesting date, in accordance with Rule 3 of Income Tax Act, 1962.
For shares of a foreign company, the FMV for RSU taxation is generally determined based on the valuation methodology specified in the employer’s RSU plan or equity policy. In the case of foreign listed shares, FMV is typically derived from the prevailing market price on the relevant foreign stock exchange on the vesting date. For foreign unlisted shares, companies commonly rely on an independent valuation or internally determined fair value, such as a 409A valuation.
This FMV, once determined, is converted to Indian Rupees using State Bank of India's Telegraphic Transfer Buying Rate (SBI TTBR) as of the vesting date, as prescribed under Rule 26 of the Income Tax Rules, 1962. The SBI TTBR is the rate at which SBI buys foreign currency from customers; it is published daily and is the prescribed rate for employer TDS purposes on foreign security perquisites.
Note: The SBI TTBR applies for converting foreign currency income into Indian rupees for TDS purposes regardless of the seller's residency status. For resident employees (whether Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR)) the employer deducts TDS on the perquisite value under Section 192 of Income Tax Act. For non-resident employees, TDS is deducted under Section 195 of Income Tax Act.
Worked example: vesting perquisite
An employee of an Indian subsidiary of a US-listed company vests 500 RSUs on 1 April 2025.
- Closing share price on vesting date: $200
- SBI TTBR on 1 April 2025: ₹84 per $
- FMV per share in INR: USD 200 × ₹84 = ₹16,800
- Total perquisite value: ₹16,800 × 500 = ₹84,00,000
This ₹84,00,000 is added to the employee's salary income for FY 2025-26 and taxed at the applicable slab rate. Assuming the employee falls within the highest 30% tax slab, the TDS obligation would be approximately ₹25,20,000, excluding applicable surcharge and cess. Since salary taxation in India is progressive, the actual effective tax rate may vary.
TDS under Section 192
Section 192 requires any person responsible for paying salary income to deduct tax at source. The RSU perquisite is salary income and delivered as shares. Since the employer cannot withhold tax from a non-cash delivery, one of three mechanisms is used.
- Sell-to-cover is where the employer sells a portion of the vested shares and deposits the proceeds as TDS with the Indian tax authorities. The remaining shares are credited to the employee. For example, an employee in the 30% bracket receiving 100 shares would see approximately 30 shares sold, with 70 shares deposited. The precise number depends on applicable surcharge and cess, which vary with total income.
- Same-day sale involves selling all vested shares on the vesting date and remitting the after-tax cash to the employee. This applies where the employer's plan does not allow partial share retention.
- Upfront cash payment requires the employee to transfer the TDS amount in cash to the employer before shares are credited. This method works only where the perquisite value is modest and the employee has liquid funds available.
Stage 2: Capital gains on sale
When an employee sells vested RSU shares, capital gains tax applies only to the appreciation after vesting, not the full sale price. This is because the FMV at vesting has already been taxed as salary, so it becomes the cost of acquisition for capital gains purposes. Only the gain above that FMV is taxed again. The holding period also starts from the vesting date, not the grant date.
Listed vs. unlisted shares
A share is considered "listed" under Indian tax law only if it is listed on a recognised Indian stock exchange. Shares of a foreign company are treated as unlisted shares in India. This affects employees holding such shares in two ways.
- First, the holding period required to qualify for long-term capital gains treatment is 24 months, not 12.
- Second, if shares are sold before that 24-month threshold, the gain is treated as short-term and taxed at the employee's applicable slab rate. By contrast, short-term gains on listed shares are taxed at a flat 20%.
Capital gains rates
The Finance (No. 2) Act, 2024, effective from 23 July 2024, restructured capital gains rates across all asset classes. These rates apply for FY 2025-26.
Listed shares (listed on a recognised Indian stock exchange):
Unlisted shares (including all foreign company shares):
Worked example for capital gains
Continuing from the earlier example, the same employee sells all 500 shares on 15 October 2025.
- Cost of acquisition (FMV at vesting): ₹16,800 per share
- Sale price: ₹18,500 per share
- Capital gain per share: ₹1,700
- Total capital gain: ₹1,700 × 500 = ₹8,50,000
- Holding period: approximately 6 months (less than 24 months)
- Classification: Short-term capital gain on unlisted shares
- Tax treatment: ₹8,50,000 added to total income and taxed at the applicable slab rate
Had the employee waited until 2 April 2027 before selling (more than 24 months from vesting), the same gain would be taxed at 12.5% LTCG, representing a materially lower tax outflow.
RSUs from foreign companies: Residential status, double taxation, and ITR obligations
How residential status determines your tax liability
An individual's tax liability on RSU income in India depends on their residential status under the Income Tax Act, 1961. The three categories are set out below.
- An individual qualifies as Resident and Ordinarily Resident (ROR) if they have been in India for 182 days or more in the financial year, or 60 days or more in the financial year and 365 days or more in the four preceding years, and have been resident in India for at least 2 of the 10 preceding financial years and present in India for at least 730 days in the 7 preceding financial years.
- An individual qualifies as Resident but Not Ordinarily Resident (RNOR) if they meet the day-count test for residency but do not satisfy both the 2-of-10-years and 730-days conditions. This status typically applies to individuals who have recently returned to India after years abroad.
- An individual is a Non-Resident (NR) if they do not meet the basic day-count threshold for residency in a given financial year.
Avoiding double taxation on foreign RSUs
RSU vesting income may in principle be taxable in both India and the company’s parent country. India's Double Taxation Avoidance Agreements (DTAAs) address this by allowing employees to claim a Foreign Tax Credit (FTC) in India for tax actually paid abroad, capped at the Indian tax liability on that income.
Where foreign tax has been withheld, the employee must file Form 67 on the Income Tax e-filing portal on or before the due date of the ITR for that year. Form 67 must be filed before the ITR is submitted, not after. The credit can only be claimed in the year the income is offered to tax in India, with no carry-forward available.
ITR filing and foreign asset disclosure
An individual classified as ROR must report RSU income and foreign share holdings in their income tax return. The applicable form is ITR-2 (for individuals without business income) or ITR-3 (for individuals with business income). The RSU perquisite appears under "Income from Salaries" as already reflected in Form 16. Capital gains from the sale of RSU shares are reported in the capital gains schedule.
Foreign share holdings must additionally be disclosed in Schedule FA (Foreign Assets) of the ITR. Schedule FA requires the employee to report, for each foreign asset: the country, name of the entity, date of acquisition, peak value during the calendar year, closing balance, and any income derived from the asset during the year.
An important distinction applies to the reporting period. Schedule FA follows the calendar year (1 January to 31 December), not the Indian financial year (1 April to 31 March). An employee who vested RSUs in October 2025 must disclose those shares in Schedule FA for calendar year 2025, which is reported in the ITR filed for FY 2025-26.
Failure to disclose foreign assets in Schedule FA can attract penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which applies independently of any income tax liability.
RSU vs. ESOP taxation: The key difference
Both RSUs and Employee Stock Options (ESOPs) are taxed at the equity delivery stage and again at sale, but the mechanics differ in ways that matter for tax planning.
For startup employees, the most material difference is that employees of Section 80-IAC qualifying companies can defer TDS on ESOP perquisites until the earlier of 48 months from the end of the financial year of allotment, departure from the company, or sale of shares. This deferral does not extend to RSUs under the statute's current text, which means RSU holders must fund the tax liability at vesting regardless of whether liquidity exists.
Managing RSU compliance
For companies administering RSU plans, the compliance workload at each vesting event is operationally intensive: calculating perquisite values at the correct FMV and exchange rate, managing TDS deposits, and generating the data required for Form 16 and Form 12BA.
EquityList maintains an audit-ready record of all RSU grant and vesting events, generates the RSU grants vesting report and audit-ready reports, and provides the structured data that payroll and finance teams need to satisfy TDS and reporting requirements under the Income Tax Act, 1961.
FAQs on RSU taxation in India
Are RSUs from a US company taxable in India?
Yes. An individual classified as Resident and Ordinarily Resident (ROR) in India is taxed on global income, which includes RSUs granted by a foreign employer. The perquisite at vesting is taxable as salary income, and capital gains on sale are taxable in India.
Do I need to file Schedule FA for RSUs from a foreign company?
Yes. ROR individuals holding shares of a foreign company acquired through RSU vesting must disclose those holdings in Schedule FA of their ITR. Schedule FA covers the calendar year (1 January to 31 December), not the Indian financial year. The disclosure must include the name of the foreign entity, country, date of acquisition, peak value during the calendar year, and any income received. Non-disclosure can attract penalties under the Black Money Act, 2015, separately from any income tax liability.
