Restricted Stock Units (RSU): Meaning and Taxation
RSUs are taxed twice in two different ways - once as salary when they vest, and again as capital gains when you sell. Most of the confusion we see from clients holding RSUs comes from not separating these two events.
Understanding RSUs
A Restricted Stock Unit is a form of employee compensation where an employer grants shares of its stock to an employee, subject to a vesting schedule. Unlike a stock option, there is no purchase price to pay - the shares are simply allotted to you once the vesting conditions (usually a service period) are met. Until vesting, you hold a promise of shares, not the shares themselves, and the unit cannot be sold or transferred.
Vesting and Taxation of RSUs
- When RSUs vest, the fair market value (FMV) of the shares on the vesting date is treated as part of your salary income for that year.
- This amount is taxed at your applicable income tax slab rate, exactly as the rest of your salary is.
- The FMV on the vesting date then becomes the cost of acquisition (cost basis) of those shares for every future capital gains calculation.
This is the point that trips up most first-time RSU holders: tax is paid in the year of vesting, irrespective of whether you sell the shares or continue to hold them. Holding on does not defer the salary-component tax. For context on how slab rates apply to your total income, see our Income Tax FAQs.
Grant Date
RSUs are awarded. No tax event - you do not yet own the shares.
Vesting Date
Shares are allotted to you. FMV on this date is taxed as salary, and also becomes your cost basis.
Sale Date
Capital gains or loss is computed as sale price less the cost basis fixed at vesting.
Worked Example
- Grant Date
- 100 RSUs granted to the employee.
- Vesting Date
- RSUs vest one year later, when the share price is ₹1,000. FMV at vesting = ₹1,000 × 100 = ₹1,00,000.
- Tax on Vesting
- ₹1,00,000 is added to salary income and taxed at the employee's applicable slab rate for that financial year.
- Cost of Acquisition
- Since tax has already been paid on the FMV at vesting, that same value - ₹1,000 per share - becomes the cost of purchase for the RSUs going forward.
Selling RSUs
When the vested shares are eventually sold, the cost basis fixed at vesting - not the original grant value - is used to calculate the capital gain or loss. If the sale price is higher than the vesting-date FMV, the difference is a capital gain; if lower, it is a capital loss. See our article on Income Tax on Interest Income for how other investment income is treated alongside capital gains.
Capital Gains Tax
Whether the gain on sale is taxed as short-term or long-term capital gains depends on the holding period measured from the vesting date - not the grant date. The applicable rate and holding-period threshold follow the standard capital gains rules for the relevant category of shares. When comparing which tax regime is more beneficial for your overall income, our article on the New Tax Regime vs Old is a useful starting point.
Taxation on Sale of Foreign Company Stock in India
- Shares of a foreign company are treated as unlisted securities for Indian tax purposes, even if they are listed on a foreign exchange.
- Both the purchase value and the sale value must be converted into Indian Rupees for the gains computation.
- The actual date of sale of the shares is taken as the date of transfer - not the date on which sale proceeds are remitted or withdrawn to your bank account.
RSU taxation gets layered quickly once multiple vesting tranches, currency conversion, and foreign asset reporting (Schedule FA) enter the picture. If you hold RSUs from a foreign or Indian employer and want this checked against your specific vesting schedule, our Taxation team is happy to walk through it with you.
