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What is RSU: Full form, meaning and taxation in India
Restricted Stock Units (RSUs) are a type of employee compensation offered by companies, typically as part of a long-term incentive plan. RSUs give employees the right to receive company shares after meeting specific conditions. In India, RSUs are becoming increasingly popular, especially among startups and multinational corporations. Understanding how RSUs work and their taxation is crucial for employees to maximize the benefits and plan their finances effectively.
RSU full form and meaning
RSU, short for Restricted Stock Units, is a form of employee compensation where employers promise to grant shares to employees after they complete a predetermined vesting period. RSUs are typically used as a retention strategy, rewarding employees for their loyalty, performance, and contributions to the company.
The vesting period in RSUs refers to the time frame an employee must wait before they can claim ownership of the shares granted to them.
How does RSU work?
RSUs work based on a vesting period predetermined by the employer at the time of granting. Here’s an overview of how RSUs typically function in India:
- Granting: Employers issue RSUs to employees as part of their compensation package, detailing the number of units granted and the vesting schedule.
- Vesting period: Employees must complete a predefined vesting period, which can range from one to several years. During this time, the employee cannot sell or claim ownership of the shares.
- Performance milestones: RSUs can be linked to specific performance targets, such as achieving sales goals or completing projects. We’ll learn more about the restrictions that can be applied in the following section.
- Taxation at vesting: Once the RSUs vest, they are considered taxable income. The fair market value of the shares on the vesting date is added to the employee's taxable income and taxed according to applicable income tax rates.
- Selling shares: After the vesting period, employees can sell the shares. Any gains from selling the shares will be subject to capital gains tax, which depends on the holding period.
Restrictions on RSUs
RSUs often come with specific conditions that must be met before employees can fully own them. These conditions may extend the vesting period or even prevent it from concluding, affecting when employees can access their RSUs.
Let us examine the various types of restrictions that can be placed on these stock units:
- Time-based restrictions
Employees are often rewarded with RSUs for their loyalty to the company. Time-based restrictions typically unlock when the employee remains with the company for a specific period.
- Milestone-based restrictions
When RSUs are granted based on achieving specific milestones, such as sales targets or revenue generation, the vesting period ends only after these targets are met. Employers use this performance-based approach to reward employees for exceptional achievements, distributing RSUs once the milestones are reached according to company policies.
- Time and milestone-based restrictions
When both time and milestone-based restrictions are attached to RSUs, employers require employees to meet a minimum tenure within the organisation as well as specific performance-related criteria. Upon completing the vesting period and achieving the milestones, employers grant RSUs to employees as a reward.
RSU taxation in India
RSU taxation in India is treated similarly to equity taxation. The fair market value (FMV) of the stock units is determined on the vesting date. If an employer provides shares from a foreign company, the currency exchange rate must also be considered.
The tax implications occur both at the time of vesting and when the employee sells the shares. Here are the tax implications for RSUs at vesting and upon sale:
Tax implication on RSU on vesting
The tax implications of RSUs at the time of vesting can vary based on different scenarios:
- Sell to cover: On completion of the vesting period, when an employee exercises the stocks, the employer needs to deduct TDS under Section 192 on the fair market value of the stocks. Upon completing the vesting period, when an employee exercises their RSUs, the employer must deduct Tax Deducted at Source (TDS) under Section 192 of the Income Tax Act on the FMV of the shares.
- Same-day sale: In this method, all shares granted to employees at vesting are sold on the same day. The applicable tax amount is paid to the government, and the remaining proceeds are transferred to the employees. As a result, employees receive a cash equivalent of the shares’ sales proceeds instead of the actual shares.
- Upfront payment: This method allows employees to pay the tax on the shares and receive the stock holdings upfront.
The sale of stocks is reflected in Form 16 and Form 12BA, which employees can use for income tax return filing. If an employee wants to reduce the tax burden, he/she can sell the shares on vesting, thereby avoiding paying capital gain tax. However, TDS will continue to apply to the sale of stocks.
Tax implication on RSU holdings sold
The sale of RSU stock holdings attracts capital gains tax, which depends on whether the holding period qualifies as short-term or long-term. The following table illustrates the applicable tax rates on the sale of RSUs based on the Union Budget 2024:
| Particulars | Shares listed on the Indian Stock Exchange | Shares not listed on the Indian Stock Exchange |
| Short-term capital gain tax | If shares are held for less than 12 months, gains are taxed at 20% | If shares are held for less than 24 months, gains are taxable as per the applicable slab rate. |
| Long-term capital gain tax | If shares are held for more than 12 months, gains are taxed at 12.5% | If shares are held for more than 24 months, gains are taxed at 12.5% |
| Exemption | Long-term capital gains of up to ₹1.25 lakh is tax-exempt. | No exemption |
Advantages and disadvantages of RSU
RSUs can be a valuable tool for employers to reward and retain employees, but they come with both benefits and challenges. Below is a breakdown of the advantages and disadvantages of offering RSUs from an employer’s perspective:
| Advantages | Disadvantages |
| Employers can use this reward to retain employees for a longer period, reducing the risk of attrition. | As the company retains ownership of the stocks until they vest, there is no dividend payout on RSUs. Employees seeking dividend income may not find this reward motivating. |
| RSUs help boost employee morale by offering long-term compensation and benefits, aligning employees' interests with the company's success. | Employees who leave the company before the vesting period ends must forfeit any unvested RSUs. For example, if an employee is granted 2,400 RSUs over four years but leaves after three years, they will forfeit the remaining 600 shares. |
| They serve as a cost-effective way for employers to enhance employee performance, which can drive productivity and organisational growth. |
Difference between RSU and ESOP
Restricted Stock Units and Employee Stock Option Plans are popular employee compensation methods, but they work in different ways. While both offer the opportunity for employees to benefit from company growth, they differ in terms of risk, control over shares, and tax treatment. Understanding these differences is essential for employees to make informed decisions about their compensation packages.
| Factors | RSU | ESOP |
| Full form | Restricted stock units | Employee stock option plans |
| Definition | A reward by employers to employees in the form of company shares, which employees acquire after the vesting period. | An option given to employees by employers to purchase company stocks at a fixed price after a vesting period. |
| Vesting | Follows a predetermined schedule, after which employees receive either shares or their cash equivalent. | Employees can purchase shares after the options vest, typically within a set time frame. |
| Risk | Low-risk, as employees receive shares or cash regardless of share price movement. | High-risk, as employees must purchase shares and their value depends on market performance. |
| Control over shares | Employees cannot control share prices during the vesting period. | Employees can decide when to sell shares based on market price after exercising the options. |
| Tax implications | RSUs are taxed upon vesting, followed by capital gains tax on any profit made when the shares are sold. | ESOPs are taxed when exercised, and capital gains tax applies when the shares are sold. |
Learn in-detail about ESOP.
Frequently asked questions on RSU
What is RSU in salary?
RSUs are a form of compensation that employers provide to employees, typically as a reward for loyalty or performance milestones. However, these shares are only granted to employees after they complete the vesting period.
How to declare RSU in ITR?
If an employee receives RSUs from a foreign company, they need to declare them under the Foreign Asset Schedule in forms ITR-2 or ITR-3. However, if the RSUs are in Indian stocks, they do not need to be declared until they are vested, as they are not considered assets until that point.
Can an employee claim capital gain exemption on the sale of RSU?
Yes, an employee can claim an exemption under Section 54F if the proceeds from the sale of RSUs are reinvested in a new residential property.
