Introduction to RSUs and Their Taxation in India

Restricted Stock Units (RSUs) are a form of incentive compensation commonly offered by companies to their employees. RSUs represent the right to receive a specified number of shares of the company's stock in the future. In India, the taxation of RSUs involves a two-phase process: taxation at the vesting stage and taxation at the sale stage. In this article, we will explore how these taxes are calculated, focusing on the Indian tax laws and recent updates.

Taxation at the Vesting Stage

At the vesting stage, RSUs are treated as part of your salary and are taxed as perquisites under the Income Tax Act. The fair market value (FMV) of the shares on the date of vesting is considered taxable income. This amount is added to your total income and taxed at the prevailing tax rates for your income slab.

Vesting Example

Consider an example where 100 RSUs vest with an FMV per share of INR 500 on the vesting date. The taxable income would be calculated as follows:

100 shares x INR 500 INR 50,000

This INR 50,000 is added to your total income for the year, and it is taxed at the applicable income tax rate corresponding to your income slab.

Taxation at the Sale Stage

When you sell the shares after they have vested, you incur capital gains tax. The treatment of this capital gains can be either as short-term capital gains (STCG) or long-term capital gains (LTCG), depending on the holding period.

Short-Term Capital Gains (STCG)

STCG arises if the shares are sold within 24 months from the vesting date. The applicable tax rate for STCG is 15%. Therefore, any profit made due to the differential between the sale price and the FMV at vesting will be taxed accordingly.

Long-Term Capital Gains (LTCG)

LTCG applies when the shares are held for a period exceeding 24 months from the vesting date. As of the latest update, LTCG exceeding INR 1 lakh in a financial year is taxed at 20%, with the benefit of indexation.

Calculation of Capital Gains

The capital gains are calculated using the following formulas:

STCG Sale Price - FMV at Vesting

LTCG Sale Price - Indexed Cost of Acquisition

The indexed cost of acquisition is calculated using the Cost Inflation Index (CII), which adjusts the original cost of acquisition based on inflation over the years.

Example Scenario

Consider a scenario where RSUs vest with an FMV of INR 500. Assume the FMV at vesting was INR 500, leading to an income of INR 50,000. After 30 months, the shares are sold for INR 700 per share.

Sale:

100 shares x INR 700 INR 70,000 (Sale Proceeds)

Indexed Cost (assuming CII adjustments lead to an indexed cost of INR 600):

LTCG INR 70,000 - INR 60,000 INR 10,000

Tax on LTCG:

INR 10,000 x 20% INR 2,000

Conclusion

In summary, RSUs are taxed as income upon vesting and then again as capital gains when sold. The specific tax rates depend on the holding period and the corresponding capital gains category. Always consider consulting a tax professional for personalized advice and to stay updated on any changes in tax laws.

Key Takeaways

RSUs are taxed as perquisites at vesting and as capital gains at sale. STCG is taxed at 15%, while LTCG exceeding INR 1 lakh is taxed at 20% with indexation. The indexed cost of acquisition is crucial in calculating LTCG.

Understanding and managing the taxation of RSUs is essential for both employees and employers in India, as it can significantly impact financial outcomes.