Among several benefits employees can get from their employers, RSU is one of them. RSU full form is Restricted Stock Units. A good reward from their employer not only boosts an employee’s morale but also encourages them to work harder. To know in-depth details of these reserved stock units and how they can benefit you, continue reading further.
What is RSU?
Restricted Stock Units (RSUs) are a restricted form of equity incentive that an employer grants to its employees. These are equity shares of the company that come with a vesting period attached to them. Since the employee in question gets them in the form of an incentive, they are not liable to pay any money for it. However, the vesting period bars the employee from selling that stock until they complete a specified tenure with their employer. The employer can also impose this restriction on the employee’s performance, where he would only be able to redeem the shares on achieving a set milestone.
Restrictions on RSU
To have longer vesting period on RSU’s, different types of restrictions can be imposed in India. Listed below are the types of restrictions:
- Time- Based Restrictions: Usually, RSU’s are provided as a reward to the employee’s loyalty by the company. Hence the restrictions on the vesting period is dependent on the employee’s decision on the previously determined period of retaining their position in the company.
- Milestone-Based Restrictions: When an employee is given a milestone to achieve such as achieving a sales figure or revenue generation, on achievement of such targets if the company gives RSUs to the employees then such RSUs are restricted based on milestones achieved by the employee. Therefore, the vesting period in this will end after achieving the target.
- Time cum Milestone Restrictions: When a vesting period is dependent on both time and the milestone. Selling such an asset the employee must transcend both the time limit and the milestone previously decided by their employer/company.
Advantages of RSU
Now that you know what RSU is in salary, there are also certain advantages to receiving them. Here are a few major advantages of RSU:
- It acts as a morale booster for employees to achieve their targets.
- It acts as an incentive for the employee to remain in the organisation.
- Employees do not need to make any payments to receive RSU.
- Employees get a part of the company’s ownership without having to actually buy it.
Disadvantages of RSU
RSU also has some disadvantages that can make them appear less attractive. Here are some of them:
- There is no dividend income attached to these stocks.
- The benefits of reserved stock units get revoked after the termination of employment. That means if an employee leaves the organisation during the vesting period, he loses his due RSU.
- If it takes too long for an employee to achieve the milestone, the vesting date can get delayed for milestone-based RSU.
Example of Restricted Stock Unit
Let’s say an employee Rishi is promised 3,000 company shares as RSU. As per the vesting schedule, he will receive 1,000 shares every year for 3 years once he completes 1 lakh sales and 1 year with his employer. Once he meets both these conditions, he will start receiving the stocks as per the vesting schedule. To know how to calculate RSU value, always take the fair market value of the share into consideration.
Taxation of RSU in India
RSU taxation in India is the same as any other equity share. For the purpose of taxation, you need to take into consideration the fair market value of the reserved stock units. Fair market value is the price at which these shares are sold on the stock market on the vesting date.
If the employee receives shares of a foreign company, then the exchange rate of the currency on the vesting date shall also be applicable. The tax on RSU is calculated both on vesting and when the employee sells his/her holdings.
Factors in RSU Taxation
Residential status
Your income is taxable in India according to your residential status. If you are a resident, all your income from anywhere in the world is taxed in India. On the other hand, if you are a non-resident or resident but not ordinarily resident and have exercised your options or sold your shares outside India, you are not liable to pay tax in India. Thus determination of Residential status becomes crucial.
Disclosures
Several disclosures have been added to income tax return forms for foreign assets. If you own ESOPs or RSUs of a foreign company, you may have to disclose your foreign holdings under schedule FA of your income tax return. These disclosure requirements are applicable to a resident taxpayer.
When options are not exercised
On the vesting date, the employee gains the right to exercise his option or buy the stocks. But there is no obligation, the employee can choose not to exercise his option. In such a case there shall be no tax implication for the employee.
Tax Implication on RSU on Vesting
There can be three scenarios in this regard:
- Sell to Cover: When the stocks are exercised after vesting is complete, the employer is liable to deduct TDS u/s 192 on the fair market value of such exercised option. Continuing with the above example, let’s say Rishi received 1,000 shares in the first year and falls into the tax slab of 30%. Now, the company will sell 300 shares, i.e., 30% of 1,000, on his behalf, and the proceeds shall be paid as tax. Rishi will therefore receive 700 net shares.
- Same-day sale: It means that all the shares to be received by employees at vesting are sold off on the same day. The applicable tax value is paid to the government, and the remaining proceeds are transferred to employees. In this method, an employee receives no actual shares but a cash equivalent of its sales proceeds.
- Upfront payment: If the employee chooses this method, he/she will pay the tax value applicable to him and get the holding of all the shares.
Proceeds from the sale of RSUs are shown in Form 16 and Form 12BA. It will include the total number of shares vested and not what the employer credited to the employee’s account. If you want to know how to save tax on RSU, you can immediately sell your shares on vesting. You would still be liable for TDS, but any capital gain on the sale of RSU can be avoided.
Tax Implication on Sale of RSU Holdings
If an employee sells his/her RSU holdings, any profit made on that transaction is considered a capital gain. The capital gain is taxable as per its period of holding. The tax is applicable irrespective of whether those shares are listed on the Indian stock exchange.
The period of holding in context to RSU is from the date of vesting to the date when the employee sells those shares. The rate of taxation has been discussed below:
| Shares listed on the Indian Stock Exchange | Shares not listed on Indian Stock Exchange | |
| Short-term capital gain | If shares are held for less than 12 months, gains are taxable at 15% | If shares are held for less than 24 months, gains are taxable as per the slab rate. |
| Long-term capital gain | If shares are held for more than 12 months, gains are taxable at 10% | If shares are held for over 24 months, gains are taxable at 20% |
| Exemption | LTCG of up to ₹1 lakh is tax-exempt. | No exemption |
| Indexation | No | Yes, in the case of LTCG |
If you receive the RSU of a foreign company, you must disclose it under the Foreign Asset Schedule (FAS). You can find this schedule in forms ITR-2, ITR-3. If you paid taxes at vesting by selling shares, those shares wouldn’t be mentioned in FAS. While selling your RSU holdings, you pay tax only on the profit made and not the entire value of the shares. This also helps in avoiding double taxation.
