Tax in India on income earned from RSU vested in foreign countries and exemption from such income

A restricted stock unit (RSU) is a form of compensation issued by an employer to an employee in the form of company shares. Restricted stock units are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a particular length of time.

Thus, the above options are mainly provided by foreign companies to their employees as a compensation for their services. In India you can relate the above term to ESOP (Employee Stock option plan) which is coming into fashion in India and start-up’s in India are issuing ESOP to their employees i.e. share of the company.

We will talk about ESOP in some other other post, here let’s talk about RSU it’s taxability when it’s vested by the employee and when he sells the same in India.

If you or any of your relative are working for Google, Amazon or Windows in India you must have heard from them that they have been offered RSU and that is nothing but shares of company and they are listed in stock exchanges outside India may be New york stock exchange or NASDAQ.

The system of RSU works in two phase: First they are offered to the employees with the vesting period and once the vesting period is over the employee becomes the owner of the shares.

In simple words vesting period can be understood and waiting period and it is basically a contract of company that if they employee works for a certain period for the company only then he will be issued the shares.

Thus, the RSU above attracts tax two times: (1) At the time of vesting and (2) At the time of sale

At the time of vesting: When the RSU vest with the employee he need to include it in his salary income as perquisite and pay tax on same. The companies many a times sell certain portion of such shares after vesting to pay the tax on such vesting to the employee and transfer the remaining shares in name of the employee.

At the time of sale of shares: Such shares attract capital gain in India second time when it’s actually sold by the employee on the stock exchange. The main question which arises in the mind of employee is whether it will long term capital gain or short term capital gain and whether he can get any exemption or not.

The answer to same is it will be long term capital gain if the employee has owned/ hold such shares for more than 2 years and such period shall start from vesting period.

If the holding period is more than 2 year it shall be long term and if the holding period is less than 2 years it shall be short term capital gain and one won’t be able to claim any exemption from such capital gain.

Long term capital gain would be calculated for such shares like any other asset where assessee can take benefit of indexation also.

In case of long term capital gain also assessee will have one option to save his capital gain tax i.e. exemption u/s 54F of the Income tax act where he can invest the sale amount in new house if he owns only one house at the date of sale.

Many countries withhold tax on such sale of RSU, thus you can claim credit of such tax while filing your income tax return in India depending on DTAA with the country and whether you are liable to pay any tax in India or not.

You can book a consultation with an expert to understand the tax planning linked to RSU here: https://www.taxontips.com/income-tax-return/

This article is just for information purpose it is always advisable to hire a professional for practical execution. If you need assistance you can ask a question to our expert and get the answer within an hour or post a comment about your views on the post and also subscribe to our newsletter for latest weekly updates.