Video transcript below (kindly note that auto-transcription may cause some errors):
Hello, and welcome. In this video, I’m talking about some final points of, foreign RSU ESOP, ESOP, ESPP, taxation, in India. Right? There is, an earlier video that I have made on taxation of RSU given by US holding company of the Indian employer. Right?
So how will the India tech India taxation work in such cases? After that, there was lot of inquiries and, you know, which I responded in the comments, so I thought to make a kind of a a separate a second part of that video, which contains some finer points. Right? So right. So here, when you talk about foreign RSU, ESOP, yes.
So let let’s I’ll just use the term RSU. Right? But I’m talking about RSU, ESOP, ESVP, everything. Right? So, as per the Indian tax law, there is a requirement in to report in schedule FA if you’re a resident, an ordinary resident, and you have any foreign assets.
So in in this case, basically, you are having just a second. You are having foreign assets in in in terms of these, you know, shares and, right, even an ESOP is a right to, buy the share, which, again, needs to be reported. So what you need to report is both you need to report in schedule f a, not only the brokerage account, not only the individual shares, but both the brokerage and the shares. So, generally, in table a 1, you report the brokerage account, and in table a 3, you report the individual shares. Right?
So you need to report both things. It’s the, like, the best practice. Right? Okay. Now multiple vest.
Now what happens in case, the RSU the vesting happens multiple times during the year. That means January, December, there’ll be, like, 4 vesting. Now, technically, if you see, you need to report each vesting as a separate lot. Right? So because there is also the columns of initial, you know, the value of the investment and, you know, lot of those columns are there.
So, see, there is no clear guidance available from the income tax department on how they need to be vested. You can report individual, line item wise vesting, or you can combine it also in 1, listing and, report. Main important see, understand here is that this is a disclosure schedule. First of all, this schedule, f a, has no relation to your tax competition. Right?
So, you know, a lot of people have this confusion that I’m reporting here something, and then at the time of capital gain, you know, something can be called. No. It does it doesn’t work like that. Right? So basic intention here is to report the shares.
So suppose we are having, like, 100 RSUs here, like, 25, 25, 25, 25, 4 times it got wasted. So, totally, on December 30 1st 2023, right, I’m talking about 2024, 25, assessment year return, you are reporting you need to report 100 shares. It should not be that you instead of 100 shares, you are reporting only 2 20 shares. Right? So that is the essential thing that you need to keep in mind.
Some numbers here, there, that’s perfectly fine, but it should not be, like, like, starkly contrasting. Right? Okay. Sale of shares. Okay.
Now how when you sell the shares, as per the Indian tax law, it is calculated it is counted as a unlisted share. So though that share may be listed in on the US Stock Exchange, but India treats it India treats any share which is not listed on the Indian stock exchanges, right, like NSE or BSE. India treats them as an unlisted share, so these foreign shares are unlisted shares. Now how about the taxation? First of all, the holding period is what?
24 months. So any holding period less than 24 months will count as short term, right, and will be taxable at slab rates, and any holding period more than 24 months will be counted as a long term. And as per the new amendment, as per finance act 2024, the now the long term tax rate is 12.5%, and there is no indexation. No indexation means at least you get you know, definitely, the cost of acquisition, you, are not eligible for the next cost of acquisition, but the calculation is much more simpler as compared to earlier time when, you know, it was a very complex calculation of long term capital gain. Now multiple lots, what happens where one sale proceed of, like, 100 shares pertain to, like, multiple vests in different years?
That means, today, you are selling 100 shares, but those 100 shares but they have invested since 2019. Right? 10, 20 shares, 10 shares, 10 shares, 20 shares. That way, 3, 4 years, it has been vested. Now as per section 145 a, generally, there is a clear accepted rule that the in such cases, the calculation has to be as per the FIFO method.
So what you need to do is that for that 100 shares, you need to create a table, right, whereby, against each share, you need to first assume that that the first lot is first released first. Fee first in, first out. Right? So the first vest is released first, then the second vest. So your calculation of 100 shares, the capital gain, will not be a simple calculation.
It will have to be split into multiple lots. Right? Like, 20 shares because the acquisition price for that lot will be different. Then, again, next 20 shares, the acquisition price will be different. Now you have to split, and then you have to find the holding period because depending upon the acquisition lot, there will be a date of acquisition of that share as per the date of vesting, right, or in case of ease of the date of exercise.
Right? So you have to basically compare the holding period for that each line item. Right? And then you have to find out is that, whether it is crossing 24 months. If it is not crossing 24 months, it is short term capital gain.
If it is crossing, it may be long term capital gain. So you may have sold 100 shares, but a part of it may be short term capital gain, a part of it may be long term capital gain. So that calculation, you’ll have to do accordingly. Now capital gains, okay. Now there are specific provisions in income tax act on the capital gains conversion that is as per rule 115.
Right? So rule 115 says that depending upon the income that you have had, so salary income, interest, dividend, capital gains, it you need to take a particular forex rate, conversion rate as for that particular so, generally, as for capital gains, it’s the last day of the preceding month, for the month in which the capital gain has been incurred, last of the preceding month. Right? So you can just check the particular rule. According to that rule, you need to find out that particular day, which is mentioned as per that rule, and, accordingly, find the SBI TT buying rate of that particular day, or you can also check out the RBI reference rate, which is available.
Right? Or if both are not available, suppose it is some other currency, which is not very common, like not a USD or a GBP, then you can just check what is what is the forex rate as on that particular date and then take that, rate. Right? But that is, like, the standard procedure. Right?
Reporting in FSI. Now this is debatable because the here, what is happening is in case of RSU or ESOP or EA okay. One more thing. Because, see, I’ve just typed certain points. I’ve no as I’m now speaking, no, things are, you know, coming up in my mind, so I’m, like, sharing what I’m sharing.
Right? So, like, there is also one question that people have is that, RSU so the question is that, RSU, it is a best state that you need to see. Right? The FMV, fair market value, and the best state is the cost of acquisition. But in case of ESOP, it is basically since there is a only the exercise of the ESOP, you know, it becomes it becomes your share, so you need to see the FMV on the exercise date.
Right? So exercise date is relevant in case of ESOP. Right? So that you need to keep in mind the difference. Okay.
FSI reporting. Now, see, here, foreign source income, in my view, is not expressly defined in the income tax act, though it is mentioned in the income tax act, the tax return that, you have to enter foreign source income in schedule FSI, but in income tax act, there are the foreign source income is defined in different ways in section 9 and, you know, in section 5 and, you know, various places, but not very clearly for the purpose of tax return, and there’s no clear guidance from the tax department also. So here, what is happening is, basically, the income is given to you by the Indian employer only in terms of shares of a foreign parent company. Right? So, technically, you can have a view that it is not foreign source income.
Right? But another view can also be taken that it is a foreign the origination of this income is from a foreign country. Right? Yes. The arrangement is between the you and the Indian employer, but the income arises from the foreign country, and then it gets remitted back to India.
So reporting in FSI, in my view, on a safe side should be done given the penalties that are there in the black money law. You should you know, what we want to be is extra conservative while our doing our reporting, so we report the income in the scheduled FSI, and whatever is the tax that is payable in India, what is, you know, the field, you can write the whatever the perquisite value is there. The tax on the perquisite value, which is reflected in the form 16, you can mention that. So that is my view, but there is other view also which says that FSI reporting need not be made. That is also fine.
I agree to that, but I will take a conservative view here in in in due to lack of any express, guideline or a kind of a circular by the CBT, I will take that view. Right? Now, yes. Backup withholding tax. Now, see, understand.
So I came across a case where the person, who had not submitted W8BEN. So in my old videos, I always tell that if you have any US source income, you should always and you are a resident of India, you should always give a a w eight b e n to your US payer of the income. It can be a broker. It can be your client. It can be anyone, who whoever has a responsibility to withhold tax.
Like, we have the concept of TDS in India. There in US, there is a concept of withholding tax. Right? So you should give a w eight b n. What is w eight b n?
I’ll make separate video on this. W eight b e n n is a basically certificate of foreign residency. That means you are a tax resident of India. What it does is that once you give the form w eight b e n, the US broker or the payer, has to withhold the tax as per the applicable law to nonresident aliens. Right?
So you are a nonresident alien as per US tax law. Right? So now in that particular case, the person did not provide the w eight BEN. Now in that case, there what the problem is that that, as per the US tax provisions now I’m not a US tax expert. Right?
I only have a limited knowledge as per my self reading, of the US tax law. There is a provision for doing a 24% backup withholding tax if there is no w eight b e n or I ten. I ten is like PAN in India. Right? If neither a w eight b e n is there nor a, a PAN is I ten is there, the payer US payer has to do a mandatory 24% backup withholding.
Right? So if, like, they pay you 100 rupees, 24 rupees will be deducted the out of the proceeds of sale. Right? And so now, the problem typical problem is can you claim that, that that 24 rupees in the Indian tax return? In my view, no.
It’s near to impossible given the Indian tax law provisions and how the schedule FSIs structured, it cannot be claimed. Right? There may be a separate view of someone else, but in my view, it cannot be claimed. And that’s why I highly suggest that to avoid that scenario, file a w eight b e n with the US broker. The only other option is to file a 10 40 n r in US.
Right? Because, actually, there was should not have been any tax because, US does not tax, capital gains to nonresidents. Right? US nonresidents. Right?
So there should not be any tax that you when you sell your ISUs in US, there should not be any tax. But because there was not a W8BEN, they deducted the tax. So the only option is to file a 1040NR. Now 1040NR filing is in a, again, a big hassle, right, for a US nonresident because you need to have an ITIN. Now ITIN applications, what I understand from CPAs is that it is taking 3 to 6 months, and then there is a very complex system that you have to give your original passport, original documents to the IRS.
You need to send them, and then they can be lost in transit. And, otherwise, you have to give a power of attorney or something like that. Plus, you have to take into account the fees of the US CPA, for doing all that. So it’s, like, maybe 300 to $600. We’ll just go in this filing of 10.40 and are along with an ITIN application.
It’s a very, very complex kind of process, and, your refund may not be, you know, up to this amount of the fee that you’ll have to pay. So take care to file w a p e n. Right? Now hold or sell. So once your shares are vested, should you hold?
Should you sell? Some people wait till the shares become long term capital gain. Right? And then sell. Now I will not, disclose my risk my view on this.
It is, covered in a separate video that I will be preparing and very shortly. So, maybe after some time if you’re watching this video, it will be already there in the repository. So you can see that video where I have given a clear view on what you need to do. Once the shares come in your account, what you need to do as a Indian resident. Right?
Okay. Now ESOP okay. So I guess I’ve already discussed the exercise date is relevant. For RSU, the best date is relevant. Right?
Because ESOP, only when you exercise the option, right, then only the shares, you get control of the shares. Now, then there is a typical case that comes is where a person is a returning NRI. That means a person has ran rendered services in US, like in Amazon US, and then he comes he is, like, deputed to the Indian, office of Amazon. So the RSUs that that he has pertain to the period. So if he has 100 RSUs, it it’s a mix of the period served in US as well as India.
Right? Now what happens in such case? Right? Is the income taxable in India? Is the income taxable in US?
Now the general provision as per the Indian tax law is that as per section 9, which is dealing with the income deemed to a pluralized in India, if the services were physically performed in India, the income with respect to those services is taxable in India. So that’s a India asserts its right to tax that income, which pertains to the services rendered for the time that the person has physically performed the services in India. And then once India is asserting its right to tax the amount, and maybe US also asserts the right to tax this amount, then we have to check the DTA aspect. So these are complex cases where we need to check the judgments and everything. So please consult in such cases, and the amount is significant.
Please do consult a CA who is who has experience, expertise in cross border tax aspects, DTA aspects, and then go with specific facts to get a clear response. And accordingly, right, you can comply with the provisions in India and US. Okay. Advanced tax liability. In case you are selling the RSUs so, basically, here, there is no kind of a the there will be no Indian tax that that gets deducted because once you sell the RSUs, so broker will straight away you know, if you have given WNBN and there is no capital gains tax in the US for US nonresidents, they will just credit the amount in your account, and there may be an advanced tax liability that may arise to you.
Because as a Indian resident, there is an income. A capital gains income has occurred. Right? And India requires you to pay the advanced tax on the capital gain. So you need to like, on the 4 dates, 15 September, 15 June, September, on all these dates, you need to do your calculations and see if there is any advanced tax that you need to pay.
Otherwise, there’ll be interest implication, right, under the act. Right? So that you need to just take care if you’re selling the RSUs. Okay. Penalty for failure.
Now what happens where you have failed to disclose RSUs? Right? Now, see, there is a flat 10 lakhs penalty that is prescribed under the black money law. So it’s a very, very harsh provision, and, the penalty is generally levied per year. In cases that it has been levied, it has been levied per year.
However, the finance at 2024, the which is basically the union budget that came last month, they have given a very good kind of a relaxation that up to 20 lakhs if there are movable assets. So this qualifies as a movable assets, shares and all. Then there is no penalty. Right? There is no penalty that will be imposed.
Right? Now understand that this when you say there’s no penalty, they it doesn’t say that you do need to disclose. The disclosure requirement in Schedule FA is still stands. Only thing is that you will get a relaxation from the 10 lakhs flat 10 lakhs penalty if your movable assets, report undisclosed movable assets is up to 20 lakhs. So that’s a kind of a relaxation because the government also understands that a lot of, like, Indian residents now, like techies, and they are getting the RSUs in US, and they may not be aware of the provisions.
Right? But now the question comes is that will this will this, kind of a provision, apply retrospectively? That means, will this provision apply to past years also? Generally, the provisions play as a prospective provisions, like, it from the date the finance act has come, like, it gets applicable from October 1 2024. Right?
But what about the previous years that you have not disclosed? Now, generally, it is also a view that is there that if the provisions are beneficial to the taxpayer, then they should be applied retrospective. Now but whether the income tax department will honor that provision, you don’t know. Right? So, yes, there is definitely this one thing that after this provision coming into effect, it can serve as a kind of a, it’s a it’s a defense to the to the person if there’s a notice that he gets that there is this such kind of a provision, and you should retrospective benefit can be given.
But it is, again, prone to litigation. So my request is that if you have kind of failed to update, you should go ahead and update the returns. Right? If, like, FY 23-24 return you have failed to update, you can just go ahead and revise the return. Do it as early as possible because, it the timeline is 31st December 2024 or, upon completion of assessment, whichever is earlier.
So you can go ahead and revise the return. But if the assessment is completed, you will have to file a rectification. Right? So that is, one thing. But for previous years, up to 2 previous years so right now where I am, I’m making this video in August 2024.
So up to previous 2 years, like, FY 21-22, and FY 22-23, you can go ahead with those years. You can go ahead and update the returns and disclose. So what basically in that return, you need to disclose certain additional income, and you’ll have to pay tax plus interest on that additional income. So what you can show is that additional whatever is the interest or dividend income, that that you have owned from the basically, dividend income that you own from the RSUs, You can disclose that, file an updated return. Now updated return, again, there is this problem that right now that I’m making this video, there is some the offline utility by the income tax department is not available.
However, some, kind of organizations like Clear Tax and all, they have made their own utilities depending upon the form that is there. So you can contact any of the, you know, ERIs, the providers, if they file the ITR – U, and you can get it filed for the past 2 years. Right? And, I don’t know. There will be, other points also, which I failed to cover.
Alright? So please feel free to mention in the comments, and I will help you to the best of my ability. Main important thing, friends, is that make the proper disclosures. Right? File the W8BEN with the broker and wait for my other video on what to do with your RSUs.
Once they are allotted, should you hold on to them, or should you sell them? So I will give you some insights there. So I hope this video was useful. Thank you so much for watching this video. Bye.