Video transcript below (note that auto transcript can cause some errors):
RSU ESOP ESPP, which is received which you receive from US company. So a lot of Indian residents, and professionals, employees of Indian companies now do start receiving a compensation, a part of the compensation as the shares in terms of RSUs or ESOPs or ESPPs from the US, holding company or the US parent. Right? So the person works in, like, Amazon India, and he receives, these, shares by the US company. So there are separate videos that I have made on the India taxation of the of these kind of, investments, how the reporting has to be done in the tax return, and how the taxation works.
So on that, I have made, like, 2 videos. Now in this video, I’m talking about a different perspective that, okay, taxation thing is taken care of, and the share shares have come into your account. You’ve paid the tax, perquisite tax, by way of sell to cover. Now the shares are in your account. Right?
There is a significant chunk of money that is there in your account. Should you hold or hold the shares, or should you sell the shares? Right? So let us discuss that. I have a few points.
So we let’s start with a case, and this is a actual case. On one of the, tax forums, that I’m there, I came across this case where the Indian resident employee held vested RSUs in the US. Now as a result of the US parent company getting acquired by a PE firm so what happens generally, these US companies that are there, they have their own kind of, the financial restructuring and all. Lot of things going on, and they get acquired. So in this case, that company got acquired by the PE firm.
So, basically, what the person had invested, he got the RSUs at, like, 200 rupees per share. Sorry. $200 per share. And, accordingly, he had paid a 30% tax in India. His tax was deducted and paid by the Indian employer.
So already he suffered that 30% tax also on that $200, which is the fair market value. Now what happened is that there’s just its announcement that the shares are getting acquired by that PE firm, and you have to compulsorily sell the shares at 80 rupees at $80 per share. So imagine a situation. The person had bought the RSUs. Basically, he was issued the RSUs at $200.
Right? He has not got any money. Right? Only the shares are credited. For that $200, there is a 30% tax that anyways got kind of paid through the sell to cover.
So he got that much less. So if he would have got 10 shares, you issued 10 shares, he would have got only 7 shares. Remember, there’s no money that has still come into his account. And now he is being asked to sell the shares because that the that company got acquired by the PE firm at $80. Right?
This was sale price is $80. So the person has gets a significant capital loss, right, through in this transaction because of no fault of his. Right? So now there there’s this question that comes in that whether you should hold on to the RSU. Yes.
It so let’s talk. We’ll use the word RSU only, instead of repeating the same words. Whether one person should hold on to the RSUs after they get credited in the account or not. Right? Now in my view, my view is there may be multiple views, that is possible.
I, my view here is no, and my reasons for that is as follows. 1st, now please understand this is this, kind of video is not from a, like, a tax perspective. Right? It’s more of a person’s financial planning. Right?
Now understand here that the vested RSUs that you have, they represent a big chunk of your investment portfolio. Right? Now please understand that a person generally, a lot of everything gets deducted by way of TDS and everything. So here, in this case, at least the person gets the shares. Also, the TDS has got deducted here by way of the Indian employer deducting the TDS, but the person the money that one gets is at times significant.
Right? And it represents a significant part of the person’s overall investment portfolio. So you have you may have made investments in India in, like and NPS, and there are there’s already amount standing on your in your account, and you made some mutual fund some share investments in India, and you have these US shares investments. So, generally, if your total portfolio is 100, right, this and this amount is, like, 15, 20% of the total portfolio, then there is no big reason to worry. But in most of the cases that I’ve seen, this amount is generally 50%, 40, 50% of the person’s total investment foot portfolio, especially for young earners.
Right? Now what it does is that it represents a concentration risk in your portfolio. Why concentration risk? It’s because all of this investment in that, as a share, is in one company. Right?
Now what happens if something goes wrong with that company, like in the case that happened? The company got bought out and, by a PE firm and whatever was the agreement between the company and that PE firm, the person had to mandatorily sell the shares to that PE firm at, whatever, $80 or at that small amount. That will be one scenario. 2nd scenario will be, strong down-performance in the of financial performance. So if there if there is a financial, nonperformance of that company, the shares the value of the shares would start to reduce.
Right? Then there may be an instance where there is a fraud, some fraud that comes out within the company. And this is not a kind of a imaginary kind of a situation. This actually happened, when Satyam was, there, and the Satyam the Ramalinga Raju confessed to his fraud. Within that single day, the shares of that company went down by 95%.
So and shares were 100 rupees at the start of the day, and in during that day, there was this this this kind of a, confession, disclosure, and those shares came down to 5 rupees. Now this can be exactly the risk that you may be also facing when you invest in a company like, Amazon or Alphabet, right, or Meta. Right? So you may be thinking, oh, it cannot you know, it things are very fine. Markets are doing good.
My company is doing good, but the Satyam investors also thought the same. My company is doing good. I’m having a very good company. The Indian economy is growing, and then there was this thing. So please understand, first of all, that the performance of the company is different from the performance of the overall market.
If there is a fraud or something like that, regardless of where the market is, there can be a significant fall in the shares and which will impact your investment. So, friends, what you need to think of is your own investment portfolio. See, jobs will come and go. Right? What you need to build is your investment portfolio, and you need to pay attention.
Lot of people and even me, when I was young, I am a CA. Still, when I was young, I’m telling you, and this is just, you know, I’m sharing or just a frank sharing, I remained so immersed in my work, in my company’s work, what I was doing, and, the work that I was doing the company, it was very hectic, you know, the my work. I even didn’t fill the investment declaration. And then they some someone told me that, Abhinav, you should not you should pay attention to your personal finances also. Right?
So being a CA, I used to, you know, ignore all these things. So my request to all of the especially the young people maybe who may be listening is that please pay attention to your investment portfolio. So now that you have got the shares, you need to, dissolve the concentration risk. Don’t keep the money in one account. One more thing I want to say, the concentration risks get increased.
Why? Because you are working in the same company. Right? So Indian arm of the same company. So, for example, something goes wrong with Amazon.
Right? Amazon shares will plummet and like Satyam shares, and even the impact will come to the Amazon India offices. They may be laying off people, right, because of that non performance or that fraud. They may be laying off people entire world across the globe. So so you are already taking a risk by working in a particular company.
You should never ever hold the stocks of that particular company in big amount. Right? Small holding is fine, but in big amounts, you should not hold, right, because your portfolio gets exposed to concentration risk in such case. So that is the first reason. 2nd, complex disco disclosure requirements.
Now what happens is that you have shares in US, and you have to if you are a Indian resident, so I’ve covered it in my earlier videos, you need to disclose foreign assets in schedule FA, right, and foreign incomes also. And and so if whatever interest dividend that you earn whatever dividend you are earning from the shares, you need to disclose in FSI and schedule FA. You cannot use ITR 1. You have to use ITR 2. Then even if in a particular year you are not working due to any reason, you have to file the, share the tax return in India.
It’s mandatory. Now if you don’t disclose, there is a flat 10 lakh penalty under the Indian black money law. Now there is a good disclosure, the good kind of a relaxation given by the Finance Act 2024, which says that if the, value of the movable shares foreign movable share foreign movable assets is less than 20 lakhs, the penalty will not be applied, but it is prospective. Whether it’ll apply retrospective, we don’t know. Right?
But that relaxation is now there. Plus, if you so there are harsh penalties under the black money law. Plus, if you have the shares, if you can do by yourself, definitely, please, you can learn and do file Schedule FA by yourself. Otherwise, if you get it done from a CA or from any third party and know all these, you know, agencies, there’ll be a higher fee for foreign income cases that you’ll have to bear every year that you are holding these assets. We need to keep this in mind.
And if and the complexity even increases if you’re selling the shares. So either just sell in one lot. Don’t sell in multiple lots because selling in multiple lots, the cop the calculations that go beyond behind. Right? So, generally, when you come for income tax return and you see the fee, oh, he’s charging so much fees, but you don’t know what the calculations that are required to compute the capital gain in compliance with the income tax act.
Right? So lot of, you know, these agencies, the, agencies or, you know, these, firms who do the taxes, and they don’t even they have, like, graduates who don’t do the things properly. Right? Because if you want to do the things properly, you need to compute the holding period for each lot, compute the capital gain, do the forex conversions for each lot. So it’s a very kind of a detailed calculation that happens, and that complexity increases if there is a sale transaction.
The complexity increases when there are multiple, bests, but in that sale. Complexity even increases when there are multiple sale transactions in a particular year. Right? So, accordingly, that much higher effort is involved. So if you’re doing for yourself, please upscale yourself in tax return filing for foreign income.
If you give it to a CA, ensure that he’s doing correctly. You go to a CA who is good in the, foreign income, tax filing cases. Right? Okay. So that is, again, a dampener that if you keep these shares, this will be the implication.
3rd, this is very, very important way few people know that that if you are a US nonresident, right, because you are a resident of India, you are a US nonresident, as per the US’ internal tax law, you qualify as a nonresident alien, NRA, as per the US tax law. Now in US, there is something called a estate tax. Right? Estate tax is basically a tax on your estate. Estate means the value of the total property, the US domiciled assets that you have, which includes these shares.
So any holding I mean, there’s a very low threshold of $60,000. So if you have assets in US of, say, like, $80,000, right, US shares, of $80,000, and you are in India, you are a tax resident, you are a US nonresident, and you die for some unfortunate death happens to you in India, the value of the assets of $80,000 will be exposed at a tax rate of 18 to 40%. So it’s a progressive tax rate. Right? So that value of the assets will get exposed to a 18 to 40% estate tax liability, and that is not all.
There is a very, very complicated process of filing a estate tax return, and then the US broker will release the money to your beneficiaries. Right? So that takes, like, one and a half years minimum. Right? And then you have to also pay to the estate attorney and all in US.
So it’s a very, very complex thing. Make sure, even if you want to continue, that your the value of the investments doesn’t cross $60,000. Right? So we do your research on estate tax, right, before, you know, keeping, before deciding. So this is, again, a very big damper for this currency risk.
So if you are an Indian resident, you don’t plan to go to US, you don’t have some long term, educational some long term goals in US, right, you are going to live in India, you will have your Indian incomes, and you have Indian expenses. So general principle financial planning principle always is that you should have your investments aligned to the currency, right, in which you will have the expenses. So if you are going to live in India, retire in India, ex the investments in US will basically expose your investment portfolio to currency risk. Now that’s why I said that maybe 10 to 20% of the portfolio that you may have by way of the US shares is fine because it helps in geographical diversification also. Right?
So not all your portfolio is in India. But above that, if, like, 50% of your portfolio is in US by way of US shares, you need to decide to liquidate some amount, make it to, like, 20, 30%. Because right now, there is okay. Like, for several years, the Indian currency has depreciated against the US currency. So net, there is an increased return that you get from any increase in the value in the US or that share in US the USD.
You because of this depreciation, you benefit. But this trend can reverse also. And if that trend starts reversing, then your returns overall net returns because you need to factor the currency risk, the net returns will start to shrink. So you so to the extent your funds are in a jurisdiction where the currency is, in a different currency from the currency in which you are going to have an expense, you your portfolio gets exposed to a currency risk. So that is also one big reason.
Now what is the suggested approach? My approach is and this is a kind of contrarian approach. Not many people will agree to it, but I am expressing my view in terms of the due to the reasons that I’ve mentioned. 1st is first of all, update w eight b e n with the US broker. Right?
Do not do not sell your shares before updating w eight b e n because if you sell the shares, if you don’t have a W8BN or a ITIN on file, there will be a backup withholding tax of 24% and, the on the value of the shares. And it is near to impossible to claim a tax credit of that backup tax, in Indian tax return. New option is to file a 10.40 n r in US, which is a very complicated, process if you don’t have an ITIN, as a as a US nonresident. Applying for that ITIN and filing 10.40 n r, minimum 300 to $600, you can just expect the CPA to charge you. So that is first reason, update WAPEN with the US broker if you’re not filed without fail.
2nd, sell the RSU after the vest as early as possible. So once the RSUs have vest, once you have exercised the ESOPs, the shares come in your account. So there is a certain number of shares will so out of, like, 10 shares, 3 shares will get sold, as a sell to cover to cover the perquisite tax in India, and, you’ll get the tedious credit of that when you file the income tax return in India. But after net so what here, what we are talking about in this video is 7 shares. Right?
See, 3 shares are already sold. That’s by default. As I said to cover, the 7 shares that are remaining, those shares, my point of view is that you of sell them as early as possible after vesting. Now what understand the implication that as a Indian resident, if you sell the these shares less than 24 months of holding, right, which is date of exercise for case of ESOP or date of vesting in case of RSUs, it will be counted as a short term capital gain and tax at slab rates. Now slab rates can be whatever slab rate that you are on, maybe 30%.
Right? As against that, if you wait for 24 months and then sell, then there is a 12.5% tax, long term capital gain tax. And now there is no indexation benefit. So the there’s, like, a difference substantial difference between 12.5% tax and 30% tax. But my view my request to you is to not go for the just the short term kind of tax savings.
Look at it from a bigger picture. If the if the, investment portfolio the percentage of the vested are issues as part of the investment portfolio is high, then at least sell to bring it down to, like, 20% holding, or maybe sell the entire lot, or maybe bring it down to 20, 25% of the holding. But don’t keep a big portion of your portfolio, because of the concentration risk. Right? So sell it and then bring the money bring the money to India.
Now there is a FEMBA provisions that if you are a resident and you have any foreign incomes and foreign assets, you need to bring it to India. So there’s, again, a gray area. But, generally, if you read the provisions, you need to bring the the money to India. So if you have any foreign income out of India, you need to bring real realize the assets, to India within a real within a reasonable time, generally, 1 80 days. Right?
So you need to bring the money to India. You cannot keep it and invest it outside India. You can bring the money to India and then again reinvest through the liberalized remittance scheme to out of India, but the technically, reading the provisions, you need to bring the money to India. That’s what we want to do. We want to bring the money to India in INR.
Right? Now when the money is in India, it fits your bank account. Don’t credit the money directly to an Indian bank account. Right? Take the money, or you can do that also because, anyways, the tax is applicable.
To bring the money in India, invest in index funds. Right? In India, you have this index funds. Now index funds are funds which take exposure in the entire index. Right?
Always, always, friends, go with index funds. Simplify your finances. Right? Go in index funds. Friends, I’ll make separate video on financial planning aspects also.
But the important thing what people miss is that they get kind of swayed by which fund is doing better, which thing is doing better. No. Just invest in plain vanilla index funds, low cost direct index funds. Invest in direct plans of the index funds, not the regular plans. Go on the AMC website like ICICI Prudential.
Select the index fund, a large cap like a large broad based index fund, right, and invest in index fund. What determines your returns over the long term is your allocation, your asset allocation. Allocation between growth assets and non growth assets, between equity and non between debt. That allocation is very, very important, which most people, they don’t think about asset. They don’t know about asset allocation.
Right? They only select the funds where I need to invest or shares and you know? So, again, there’s a different topic at all to discuss, about the financial planning aspect. I’ll cover that in that topic. But when you come when you invest in India, don’t invest in 1 company’s share.
Then you’ll be making the same mistake. Invest in index funds, which will completely eliminate the concentration risk. Now in India so your question may be for geographical exposure, what you should do. So what you can do is that instead of keeping money in out of out of India for geographical exposure so, yes, there is a merit in having a geographical exposure, keeping a certain portion of the funds out of India, But what you can do is that you bring the entire money to India. You off from a per off a percentage of that money, you can invest in Indian feeder funds that invest in S and P 500.
Right? So you have, like, a Motilal Oswal S&P 500 Fund, which invests in S and P 500, right, but which is an Indian fund. It’s taxed as an Indian fund. So when you do that, what’ll happen is there is no currency risk. The funds are in INR.
There is no estate tax risk because there is no US domiciled assets, above $60,000. You don’t need to file a schedule very complicated tax return and filling every detail in the schedule FA, so you get sealed from that. Right? So all that and, also, there is no concentration risk on the portfolio because you’re investing in index funds. This is a suggested approach.
This is a view. Please think about that, this, and then take your decision. So I hope this video was useful. Thanks a lot. Do share your comment, your feedback, your thoughts on this, video.
Thank you so much. Bye.