RSU Taxation Explained: How Restricted Stock Units Are Taxed

Restricted Stock Units (RSUs) have become the most common way for giant organisations to reward employees, especially in tech, finance, and fast-growing firms. For many, RSUs seem like ‘extra’ income that arrives in shares rather than cash. But tax teams and payroll systems treat them very differently: RSUs are usually taxed like salary when they vest, and then taxed again (in a different way) if you later sell the shares for a gain.

What are RSUs?

RSUs are a form of employee compensation in which a company promises to grant you shares of its stock at a future date. These shares are not given immediately. They are released only after you meet certain conditions. This process is called vesting.

RSUs are mostly offered by listed companies and fast-growing startups to reward employees and keep them motivated long term. Once RSUs vest, the shares become yours, and their value is treated as part of your salary and taxed accordingly. You can then hold the shares or sell them, depending on the company rules.

Restrictions on Restricted Stock Units 

RSUs come with certain conditions that decide when and how you actually receive the shares. Here are the details:

Time-Based

In this arrangement, you earn RSUs simply by staying with the company for a set period. Most plans usually follow a four-year schedule, where 25% of your RSUs vest each year, but after completing a one-year cliff. If you leave the organisation before the vesting date, any unvested RSUs lapse.

Milestone-Based

Here, RSUs vest only upon achievement of predefined milestones. These milestones can be individual (such as meeting sales targets), team-based, or company-wide (such as revenue, an IPO, or a product launch). If the milestone is delayed or not achieved, vesting may be postponed or may not happen at all.

Time-cum-Milestone

This is a combination of both time-based and milestone-based conditions. You become eligible for the RSUs only after fulfilling the tenure requirement and the milestone condition. For example, even after completing three years of service (one of the vesting criteria), it will only vest after the company achieves profitability as outlined in the agreement.

Benefits of RSUs

RSUs offer the following perks:

• No upfront cost: RSUs are issued to you by the company at no cost. You do not need to invest your own money to receive them, unlike stock options that require you to buy shares.
• Lower risk: Even if the share price falls, RSUs still have some value as long as the company’s stock is not zero. Stock options can become worthless if the price drops below the exercise price.
• Wealth Creation: RSUs encourage you to stay invested in the company over time. If the company grows and the share price rises, the value of your RSUs can increase significantly.
• Employee Retention Benefit: Vesting happens over multiple years, which encourages you to continue with the company and gain from upcoming vesting rounds.
• Strong Compensation Value: RSUs can make up a valuable portion of your overall pay, particularly in listed or rapidly growing companies, and may grow well beyond your regular salary and bonuses over time.

Disadvantages of RSUs

RSUs are not without drawbacks; here are some:

• RSUs are taxed when they vest, based on the market price on that day. You must pay tax even if you keep the shares and do not receive any cash from selling them.
• Vested RSUs are treated as salary income. This can place you into a higher tax slab and increase surcharge and cess, leading to a heavy tax outgo in a single year.
• The value of RSUs depends entirely on the company’s share price. If the price falls after vesting, you may still have paid tax on a much higher value.
• If you leave the company before vesting, any unvested RSUs are generally cancelled, lowering your total expected pay.
• Tax on RSUs spans multiple heads, such as salary, capital gains, and foreign assets, and even small reporting mistakes can result in compliance issues or penalties.

How is RSU Taxed?

Here are the key scenarios you need to know when computing RSU taxation:

1. Grant Date

At the grant date, RSUs are only a promise by the employer to give shares in the future. You do not receive actual shares on this date. Because nothing of monetary value is transferred to you at the time of the grant, no tax is charged at the grant date in most countries, including India.

The key reason is simple: a granted RSU has no market value on its own. You cannot sell, transfer, or use it as an asset. Since income tax is applied only when a benefit has a clear and measurable value, tax authorities do not treat RSUs as taxable income at the grant stage.

However, the grant date remains important for documentation purposes. It records:

• The number of RSUs promised
• The grant price (usually the market price of the share on that date)
• The terms and conditions attached to the RSUs

2. At Vesting

RSUs are primarily taxed at the vesting date under section 17(2)(vi) of the Income Tax Act. If you are unfamiliar with this term, vesting is the point at which the shares legally become yours after meeting service or performance conditions. On the vesting date, the fair market value (FMV) of the shares is treated as a perquisite and taxed as salary income under the Income Tax Act. 

It is the responsibility of your employer to deduct TDS on this value, either by withholding cash, selling some shares, or adjusting it against your salary.

As per Section 49(2AA), the FMV taxed as a perquisite becomes the cost of acquisition for capital gains when the shares are eventually sold.

Here is a quick example to help you get this concept better:

Suppose you work for a listed global tech company and receive 100 RSUs as part of your compensation. These RSUs vest after one year.

On the vesting date:

• FMV per share is ₹2,000
• The number of shares you vested is 100

Taxable salary value = 100 × ₹2,000 = ₹2,00,000

This ₹2,00,000 is added to your annual salary income. If you fall under the 30% tax slab, the tax on RSU vesting would be roughly:

• Income tax (30%) = ₹60,000
• Plus applicable surcharge and cess

Your employer may sell around 30 shares to recover the tax and credit the remaining 70 shares to your demat account. From a tax perspective, this vesting price (₹2,000 per share) also becomes your cost of acquisition.

Sale of Shares

When you sell shares received through RSUs, you pay tax on the capital gain from the sale. This tax is different from the tax already paid when the shares were first credited to you. At the time of sale, only the price difference between the sale value and the FMV on the date the shares were allotted is considered.

To compute capital gain, use the following formula:

Capital Gain = Sale Price – FMV on the date of allotment

The type of capital gain depends on how long you hold the shares before selling them:

Type of Capital Gain	Companies Listed on Indian Stock Exchange	Companies Not Listed on Indian Stock Exchange
Short Term Capital Gain	If the shares are sold within 12 months of allotment, the gain is taxed at 20%.	If you sell the shares before 24 months, any profit that you have made will be taxed as per your slab.
Long Term Capital Gain	If the shares are sold after 12 months, the gain is taxed at 12.5%.	If you hold the shares for more than 24 months, the gains are taxed at 12.5%.
Indexation Benefits	No	No
Exemption	Long-term capital gains up to ₹1.25 lakh are exempt from tax.	No exemption

Assume your employer allots you 100 RSU shares.

• FMV on allotment date: ₹1,000 per share
• Total FMV: ₹1,00,000

Later, you sell these shares after 3 years at:

• Sale price: ₹1,600 per share
• Total sale value: ₹1,60,000

Capital gain calculation:

= ₹1,60,000 (sale value) – ₹1,00,000 (FMV at allotment) = ₹60,000

As the shares were sold after 12 months, the ₹60,000 gain qualifies as long-term capital gains. But since the gain is below the exemption threshold, no LTCG tax of 12.5% is applied.

If the sale price had been below ₹1,000 per share, the difference would be treated as a capital loss, which you can offset against other capital gains under the tax rules.

RSUs and Section 89A of the Income Tax Act

Section 89A covers income that sits in a foreign retirement account, such as a US 401(k) or IRA, as well as in some recognised retirement accounts in the UK and Canada. In these cases, the overseas country taxes the money only when you withdraw it. India, however, normally taxes the same income each year on an accrual basis. Because the tax timing differs, a mismatch can prevent the foreign tax credit from being claimed and result in double taxation in different years.

Section 89A allows an eligible Indian resident to defer Indian tax on that retirement-account income until the year it is taxed abroad on withdrawal/redemption.

Who can use it?

• You are a resident of India in the year you claim relief.
• You have a specified retirement benefits account in a notified country (the CBDT has notified the USA, the UK (including Northern Ireland), and Canada).
• You opened that account when you were a non-resident in India and a resident of that foreign country, and that country taxes it mainly on withdrawals.

How you claim it: You must file Form 10EE electronically by the ITR due date. Once chosen, it generally continues for later years.

Section 89A does not reduce or change the normal RSU tax in India (salary tax at vesting and capital gains on sale). It only helps if the investment growth is inside a foreign retirement account. Example: if your retirement account holds shares (even employer shares), any dividends/gains inside that account can be taxed in India when you withdraw, matching the foreign tax year. 

Cross Border Challenges With RSUs

People who have worked across countries during the vesting period (common with global tech roles and NRIs), the ‘double event’ can become more complex:

• Country A may tax vesting as employment income (because you earned the RSU during employment there).
• Country B may tax vesting (because you are a resident there at vesting).
• Later, capital gains may be taxed where you are resident when you sell, and sometimes where the shares are located/listed, depending on local rules.

RSUs do not automatically cause double taxation, but differences in country-specific tax rules can lead to the same income being taxed twice.

Let’s take a hypothetical example for this.

Suppose you are an engineer and receive RSUs worth USD 100,000 while working in California in 2023. In 2025, you move to Bengaluru. The RSUs vest in 2026.

Based on workday apportionment, you spent 60% of the vesting period in the US and 40% in India. That means USD 60,000 should be taxed in the US at rates of up to 37%, while USD 40,000 is taxable in India at 30% plus surcharge.

However, if both countries tax the full USD 100,000 because apportionment is not applied correctly, you could face double taxation of more than USD 67,000. Any relief, then, depends on your successfully claiming the foreign tax credit under the US–India DTAA.

Smart Strategies for Managing RSU Taxes

Here are some key strategies you may follow to manage RSU taxes:

• Use Sell-to-Cover: To handle RSU taxes, sell a part of your shares as soon as they vest. This is often called a ‘sell-to-cover’ option. It helps you pay the tax straight away, so you don’t need to dip into your own savings later.
• Maximise Tax-Deferred Accounts: Use the proceeds from RSUs to contribute to tax-deferred accounts, such as 401(k)s or IRAs. Reducing taxable income in the vesting year can lower your overall tax rate and lessen RSU tax impact.
• Fund an HSA: If you qualify, you can use your RSU money to fund a Health Savings Account. These contributions reduce your taxable income today and let you withdraw the money tax-free later for medical costs.
• Diversify Regularly: Don’t keep all your RSU-allocated shares; sell them in phases instead. When you do so, you spread risk and avoid over-dependence on your employer’s stock.
• Coordinate with Losses: Tax-loss harvesting allows you to use market losses to offset profits from RSU sales. You can use this method to reduce the taxes you owe.

Conclusion

The next step is to turn awareness into action. Start by listing your RSU grant dates, vesting schedules, and past sales, and match them with your tax returns. Check whether enough tax was deducted at vesting and whether capital gains were reported correctly. If you have worked across countries, review treaty relief and foreign tax credit eligibility early, not at filing time. Most importantly, plan future vesting events in advance, decide when to sell, and seek professional advice to avoid last-minute tax shocks and costly compliance errors.