In this video, Abhinav is discussing about the Taxation of Restricted Stock Units (RSU) received from US company in India
Video transcript below (auto-transcription can cause some errors):
Hello. I’m CA Abhinav, and welcome. In this video, I’m sharing, taxation of RSUs issued by the US holding company of Indian employer. So here, what is the case is that the employee is a Indian tax resident. Employee is a Indian resident, resident and ordinary resident as per Indian tax law, and employed by an Indian company, say, like Amazon or Facebook.
Right? Facebook India or Amazon India. Right? So and the as part of the compensation, he gets the RSUs issued by the US parent company of the Indian company. Right?
So in case the employee is, like, into Amazon working in Amazon India, he gets RSUs issued by Amazon US. So in this case, how will the taxation India and US taxation work? So let us discuss on that. So coming to task tax aspects, RSUs restricted stock units are like normal shares. The only difference between a normal share and a restricted stock unit is that an RSU is given as a compensation, and there are certain conditions associated with when the RSU gets vested and when you can, sell the RSUs.
Right? So, basically, they vest there are certain requirements. There is, like, a, proper agreement, kind of a schedule, when the shares vest. Now the vesting conditions may be related to the time period of vesting employees, kind of, duration in the company or some certain performance based milestones. Right?
Now grant at the time of grant of RSUs where the you don’t have any right to you know, in cashing those RSUs, there is no tax. Right? Only grant is not taxable. Taxable is when the RSUs get vested. Vested means you acquire a right in those RSUs, and then you can go ahead and sell.
Right? Now that’s when the RSUs get vested now here, understand the situation. The employee is a employee of an Indian company. The RSUs he receives RSUs as part of the compensation, but the RSUs he receives in US. Right?
Now irrespective of where the person receives those RSUs, which country so you cannot say that I’m an Indian resident. I’m receiving something in the US. It is not taxable to me. No. As per Indian tax provisions, if a person is a resident and ordinary resident, his worldwide income is taxable.
One more thing one other provision is that if a person does some services in India and physically performs services in India and for that he gets a compensation, the income is deemed to accrue and rise in India only. Right? So irrespective of where he receives the money, the compensation, in which country, in which kind of instrument, the income to him is taxable in India. So here, since the services were physically performed in India, the person is an Indian tax resident. This income is taxable in India as a perquisite income.
See, what happens in RSU is it’s basically a agreement understanding between 3 entities. 1 is the Amazon India, second is Amazon US, and third is the broker. The broker may be like E Trade or Fidelity, whichever US broker. So there is Amazon US and Amazon India have an understanding that, okay, this person has to be given this much compensation, and the compensation will be transferred, to the Demat account of the person in this particular broker, and the broker is also given instructions to track to credit these many shares and then to sell it to cover those many shares to withdraw the tax and all those things. So it’s like a tripartite understanding between 3 entities regarding this compensation that they are giving to you.
Right? So when the RSUs vest, it is taxable to you in India. It is taxable as income from perquisites. Under income from salaries head, it is taxable. So right?
Now there’s no tax withholding in US on the vesting of these shares. So no tax withholding in US. It’s taxable in India. The broker will credit the shares in your account. Now after you after the shares are vested, they come into the account, then you have the right to sell the shares.
Now when you sell the shares, it is taxed as capital gains in India. Right? Now why cap why taxable as capital gains in India is because you are an Indian tax resident. You are a ROR as per Indian tax law. So any worldwide income that you have, it will be taxable to you in India.
So on the sale of the shares, it will be taxed as capital gains in India, income from capital gains. Now these shares, since they are not listed they are not listed on a recognized stock exchange in India. They are listed outside India, so they will be treated as unlisted shares for Indian tax calculation purposes, and the holding period is 24 months. Right? So holding period for these shares for example, like, if you talk about listed shares in India, the holding period is 12 months.
But here, the holding period is twin 24 months. That means if you sell the shares within 24 months of vesting, it will be taxable as short term capital gain in India, and tax slab rates. If it is long term, that means the difference between the time of date of sale and the date of vesting is more than 24 months, then the long term capital gain will be taxed at 20%, and you will get also the indexation benefit. Right? Now how to calculate capital gains?
Now how India calculates cap it’s this is again a bit gray area because in India, there are very clear regulations given with respect to the ESOPs. But for RSUs, there is no separate thing that is given, but the RSUs also the understanding is the same because the income when the RSUs got vested, the income was treated as a perquisite and offered to tax in India. The cost of acquisition for the purpose of RSUs sale will be treated as the fair market value on the date of vesting. Right? So here, the capital gain will be sale consideration.
That means whatever amount you get from the sale of the shares minus the fair market value on the date of the vesting. Right? On that amount, you need to pay capital gains tax in India. Now in US, there is no tax on capital gains because for the US tax purposes, you qualify as a nonresident alien. So there is no capital gains tax, in US on those sale of shares in US.
So in US, the entire proceeds will be given to you. You there must be a w eight b e n form that you must have provided to the broker. Right? So there is no tax in US. They will give the, the they will credit the full shares to you, but India will tax this amount depending upon short term, long term gain.
Right? Okay. Now what is the process? How does it work? Right?
Now what happens is that okay. Decided that, okay, you will get x amount of as comp of compensation as so all this thing is pre-decided, right, depending upon what is your designation and everything. Right? So company has a general, like, a RSU policy for all the employees of the company depending upon the grades, levels, the time that you have served in the company, and other milestones, they decide that, okay. This person has to be given x amount of shares as RSU, which will vest at this, this, this, this time.
Right? So that is pre decided, pre agreed. Right? And employees also given the information about the same. So at the time that the shares have to be vested, the Amazon US so it’s a again, I that as I said, it’s an understanding between Amazon India and Amazon US.
So Amazon India will give directions to Amazon US that this person, Amazon US will credit the shares in the individual account of that particular employee, the demand account of that employee with the US broker. Right? Now at the time of vesting, whatever the FMV of the shares is there, right, what is the market value of the shares is considered as a perquisite, and that perquisite is reflected in your form 16 in India. Right? So, again, so there is a information exchange between Amazon US and India And Amazon India, what it will do is it will show that perquisite amount with whatever 100 rupees or as a 100 rupees if the, the value of the RSU shares is this.
That 100 rupees will be reflected as income. So when you see in your form 16, it will be shown as a perquisite amount in your, salary section in the form 16. And against that, whatever does the tax that has been deducted. Right? Because, see, as per Indian tax law, the company has to deduct a TDS on the salary that they pay.
Right? So how they deduct TDS? Generally, they sell a certain number of shares to cover the tax. Right? And so I’ll come to that.
So the income is reflected in form 16 as the income from perquisite. Now India tax on the sale of shares because the Indian employer, Amazon India see, here, what is happening is Amazon India is giving you the perquisite income, though the shares are credited by Amazon US, but the technically speaking, it is Amazon India who is paying you salary as a perquisite income. Amazon India is is required under Indian law under Indian tax law to deduct tax amount. So how it will deduct the tax amount? It will instruct the Amazon US that please deduct a so suppose 10 shares were given and suppose 30%, assuming, like, a 30% tax rate person is on.
Right? So 3 shares, Amazon US, the broker, will deduct 3 3 shares. After the credit of the 10 shares in the demat account, 3 shares will be deducted. That 3 shares the value of those 3 shares will be reflected in what? In your form 16 under TDS section, and that tax will get deposited with the Amazon India will deposit in the government account in the to the income tax department, and that will also get reflected in your form 16.
Right? So this is how this whole transaction works. Right? Now there is a minor capital gain or loss that happens. Right?
Because what happens, 10 shares get credited on, like, 1st October. Right? But they don’t get deducted same day. There is generally a time lag of, like, 5 to 7 days, 10 days, right, of deduction of that 3 shares, from that 10 shares. So that 3 shares, when they get deducted, there is a minor difference in the value.
It may be a gain. It may be a loss. So the it’s to the extent there is a deduction in the value or whatever change in the value, that will be a capital gain or loss, and you have to separately report that in your Indian tax return. So people who have US RSUs and, they need to file a tax return, it the calculations are complicated. You have to take professional help.
Otherwise, you need to really study the provisions and then offer the income correctly. The income has to go in the in salary income, which is the form 16 income, capital gains income, schedule FSI, schedule FA, all those schedules, you need to properly take care of that income. So whatever the capital gain or loss that happens will be reflected as short term capital gain or because the it is within 24 months. The sale is happening within 24 months, so it will be short term capital gain or loss that will be reflected in the Indian tax return. Right?
Okay. Now some points important points here. Now what option that I have told you there are basically various options how to deduct the tax. 1 is a net shares option. That means 10 shares are issued and 3 shares are deducted as as tax.
Instead of that, what the company can do is that they only credit 7 shares in your account. Only the net shares they credit. That is one option. 2nd is sell to curve, which is very, very common, right, and which is the option that I explained in my in this, video that 10 shares are credited. At the time of credit, it’s treated as perquisite, and then 3 shares are deducted as tax.
So that is sell to cover. Then there is a third option called cash deposit, whereby you let the you let the, company credit 10 shares. They don’t have the right to sell the 3 shares as tax. Employee has the right to deposit the cash, the respective amount of tax. Employee, if he has a cash balance in his Demat account, though, that amount is deducted from his cash balance.
Right? So there are various options, and in many cases, the employees have a choice which option they want to exercise. But, generally, they are not told about that choice, and it’s like a very quick, affair that, you know, this sell to cover option automatically by default something is selected. So you can check with your finance team or HR team on this. Now, tax liability in India arises irrespective of residential status if the service is pursuant to ease of now take a situation.
Now this is a tricky situation whereby the person was, rendering services in US and in Amazon US, and he got transferred midway to Amazon India, and RSUs that he has got in Amazon US are, pertaining to the services done in US as well as India both. So in that case, what will be the tax? So it’s a tricky thing. Basically, here, Amazon you basically, US under US has as a country has the right to tax a certain amount of the RSUs because the services were rendered in US, and India has the right to tax because some portion of the services were physically rendered in India. In that case, if, for example, both the countries are taxing that income, then you need to resort to the India US DTA provisions.
The respective article is dependent personal services, and it needs to be examined, right, what can be done. Okay. Now very, very important thing, and I will highly, highly, recommend everyone to provide a w eight b e n document, to your US broker in such cases. Right? So what is w eight b e n is basically it’s a proof.
It’s a certificate that you give to the US broker. It’s a self certification that I am a tax resident of India. Right? Otherwise, how will they come to know? Right?
Because only when you give this documentation, they know that, okay, this person is a tax resident of India, and this person is basically a nonresident alien as per US tax purposes. So there is zero capital gains tax we need to imply. Otherwise, the provision the US tax provision is that if you do not have w a b e n or an I ten I ten is like PAN. Like PAN we have in India, there is an I ten in US. Right?
So if they don’t have w eight b e n of yours if you they don’t have a I ten of yours, then what they will do, they will they will impose a 24% backup withholding tax on the share shares. So in that case, what may happen is that suppose out of 3 shares had to be sold, they might sold 4 shares. That one more share may go towards the back 24% backup withholding that they are doing that the US broker is required by US law to do. Because there is no w eight ban on file, there is no ITIN on file. Right?
So very, very important. And the problem with that 24% backup withholding is that despite India and US having a DTA, despite India having section 91, the provision for foreign tax relief, still it is not you may not be able to claim the FTC, foreign tax credit of that tax in India in your income tax return. And, ultimately, what you’ll have to do is that you’ll have to if you want a refund of that money because the it was not taxable. Right? Because the US doesn’t impose any tax on capital gains on nonresidents.
Just because there was no w eight, b e, and or write in, they deducted the tax. So if you want to claim that refund, right, of that 24% tax, what you will have to do is you have to file a 10 40 n r in US. 1040 n r is like a basically nonresident a US nonresident has to file that return. Right? And you have to file that to claim a refund.
But important thing here is that along with that 1040NR, you will have to also file a ITIN application. Right? And the practical problem the practical challenge that I’ve understood from the various CPAs and all that I have interacted is that there is a long time gap, at the end of IRS, in issuing the ITIN. So there is, like, 3 to 6 months waiting period for the issue of ITIN. Plus, there are practical challenges, like you have to send your actual, I, the original passport to the IRS, and there is this risk that your passport may, you know, may get lost in transit and all those things, happen with respect to the ITIN application.
So, my request is that, if you have RSUs, ensure that before you sell the RSUs or as soon as you have your RSUs credited, ensure that you have a w eight b e n file, to the US broker. It’s a very, very simple form. I’ll make a separate video specifically on how to file w eight b e n where I’ll explain this. Okay. Now make sure to disclose the r h u perquisite amount in shares.
So what will be the incomes? Right? What will the foreign incomes in this case? Foreign income as assets. 1 is the perquisite amount.
Though the in there is a perquisite given by the Indian employer, the income technically can also be set as foreign income because the income is paid out to you outside India. Right? So safe side, we would want to disclose this income in Schedule FSI because there is a very high penalty, right, of nondisclosure. So RSU perquisite amount can be disclosed in FSI. Then the shares, the RSUs that you hold, right, those shares need to be disclosed in Schedule FA, and, also, you need to disclose the US brokerage account that you hold.
Right? So, basically, you need to make certain disclosure, schedule FSI and FA. Right? Now if you don’t disclose if you are an Indian resident and honorary resident as per Indian tax law, you need to disclose. You need to file a return and disclose these amounts.
If you don’t disclose, there’s a flat 10 lakh penalty. Right? And there are decisions of tribunal level where this kind of a penalty I know it’s a very harsh penalty, but it has been upheld because it’s very clear provision in the Indian black money law. Plus, in case of willful nondisclosure that you know that this had to be disclosed and you don’t disclose, then it the penalties can also go up to a jail term. Right?
So so it’s that harsh under the Indian Black Money Law. Right? So you need to be very, very careful that, you need to make the proper disclosures in the respective schedule, FSI & FA. You cannot file ITR 1. You have to file ITR 2.
Right? Only ITR 2 has the relevant schedules for these incomes. Okay. If you forgot to disclose. Right?
If you okay. One more thing. If your income is more than 50 lakhs, then you need to also file schedule a l. Right? Total Indian income is more than 50 lakhs.
You need to also should file should you a l, and you need to also disclose your the US RSUs that you hold in the schedule a l. Now what happens if you forgot to disclose? If you forgot to suppose it’s like we are in July right now and you forgot to disclose, you file the return, immediately revise the return. Right? Don’t wait.
Revise the return. Make the proper disclosures. If the returns pursue are pursuant to prior years, try if you can file the updated return. You’ll have to pay some tax and penalty, right, tax and interest, and you can file an updated return. Last resort, if nothing else is there, you cannot the timeline for revision of return, which is, like, December 31, 2024 for AY 23-24.
That has expired. Updated return timelines have expired. Last resort is an email to assessing officer, because you have the email, that these are the details I forgot to disclose in those years. I will not aware of that. At least what you will get protected is that in case there is a levy of the penalty, you can claim that there was no intention to not disclose.
Right? But, again, it needs to be carefully considered, take professional help of a CA before kind of, taking any of the roots. Right? Okay. 1 financial planning.
A suggestion from our investment planning, financial planning, I will suggest is that when you have RSUs in your portfolio, please understand that you are taking a bet on one company. Right? So in my view, that and that’s that is the concentration risk. Suppose what happens suppose you wait for 3 years, some scam comes out in that company like what happened to Satya, Right? And the shares come from 100 to maybe 10 or even 5.
Right? That particular very significant portion of your investment, the wealth will erode. So better always that when you have the RSUs that is vested and you can sell those RSUs, go ahead and sell. Don’t wait to for the holding to cross 24 months so that you can claim a reduced 20% capital gains tax in India. My request is this is my personal view.
This is finally your choice, but don’t wait for that, that I will save on that 10% tax. Better to sell and invest in index funds. Invest in low cost index funds. You invest in US or you invest in India. Right?
And you also can take exposure in US funds in US securities, through India, through the feeder funds that we have now. Right? So what it will do is that it will take away the concentration risk in your investment portfolio because of the RSUs of 1 company. Right? So this is it.
This is it. I hope this video was helpful in some way. Let me know if I’ve missed any point, any important point. Right? So and if you have any queries, comments, do share in the comment section.
Thank you so much for watching.