Been working at a MNC for some time now and RSUs are still somewhat of a mystery to me. I read that it’s better to sell them as soon as they vest, and mine vest every year (fully in 4 years). Some of my stocks vested last year towards the end of the year but I didn’t sell them. If I were to sell them now, what would the tax implications be.
Every year at Quicko, we go through thousands of income tax returns, and one thing we often spot in Form 16s is that more and more companies are offering equity to employees. Be it ESOPs, RSUs, SARs — equity compensation is clearly on the rise.
And it’s not just MNCs anymore. Even startups are using equity to attract, reward, and retain good talent.
We’ve already broken down how ESOPs are taxed in a separate post. Today, let’s talk about RSUs, and how they’re taxed in India.
What are RSUs?
RSUs, or Restricted Stock Units, are a form of equity compensation that companies give to employees. Think of them as a promise of shares, not actual shares right away.
You don’t get them on Day 1. They’re granted to you, and you’ll receive them over time, as long as you stay with the company.
This is where vesting comes in.
Let’s understand how vesting works with an example.
How do RSUs work?
When your company grants you RSUs, they also set a vesting schedule, which is basically a timeline that tells you when and how many RSUs will convert into actual shares.
Let’s say you’re granted 100 RSUs with a 4-year vesting schedule, with a 1-year cliff. Here’s how that would play out:
- In year 1: Nothing vests, this is the cliff.
- On your 1st anniversary: 25 RSUs vest and they are transferred to the demat account with the registered broker of your company.
- After that, the remaining 75 RSUs vest monthly/quarterly over the next 3 years
How are RSUs taxed?
RSUs are taxed twice — first as salary, then later as capital gains.
Let’s walk through both.
1) Tax at the time of vesting
When your RSUs vest, they convert into actual shares or or gives you an equivalent cash payout, and that’s when the first round of tax kicks in.
The fair market value (FMV) of the shares on the vesting date is treated as perquisite income and gets added to your salary.
Your employer deduct TDS on this amount, and it reflects in your Form 16. At this stage, RSUs are taxed at your slab rate, just like your regular salary.
There are three common ways this tax is collected:
- Sell to cover: The company sells a portion of your vested shares to cover the tax, and the remaining shares are credited to your account.
- Same day sale: All vested shares are sold immediately, and you receive the net proceeds after deducting taxes.
- Upfront payment: You pay the tax from your funds (salary or bank account), and the company credits the full number of shares to you.
2) Tax at the time of selling the shares
Once the RSU shares are vested, you’re free to sell them whenever you choose.
And when you finally decide to sell your RSU shares, the second tax event happens — this time as capital gains.
A few things to note:
- The purchase cost/cost of acquisition is the FMV on the vesting date (i.e. the value already taxed as salary).
- The vesting date is treated as your date of acquisition.
Hence, your capital gains would be:
Capital Gains = Sale Price – FMV on vesting day
And depending on the type of company and holding period, your tax rate will be decided. You can refer to the table below.
ESOPs vs RSUs: Key differences
We get this question a lot — and it’s valid. Both are forms of employee stock compensation, but they work very differently.
RSUs are grants of shares. The shares (or equivalent cash) are automatically given to you on vesting. And since that’s considered salary income, TDS is deducted as soon as RSUs vest.
ESOPs, on the other hand, are options — meaning you get the right to buy shares, but it’s not compulsory to exercise that right. That’s why TDS is deducted only when you actually exercise your ESOPs and purchase the shares.
Here’s a quick breakdown:
You can use platforms like https://www.spectraanalytica.in/ to generate your Schedule FA reports btw.
They don’t support all companies but do have few big ones which might work for you.