For Indian employees who receive Restricted Stock Units (RSUs) from foreign companies, understanding the tax implications is crucial. RSUs are a common form of compensation offered by multinational corporations to their employees worldwide. However, the taxation of RSUs can be complex due to various aspects such as domestic tax laws, international tax treaties, residential status of the employee, the timing of taxation and the exchange rate used for conversion. In this write up let us explore the taxation aspect of these stocks in India.
Understanding RSUs
RSUs/Restricted Stock Units are a form of equity-based compensation where employees are allotted shares of a stock after a certain vesting period, at zero cost. Unlike stock options, which give employees the right to purchase shares at a predetermined price, RSUs grant actual shares once the vesting conditions are met.
Taxation of RSUs
The lifecycle of an RSU has 3 stages:
- Grant
- Vest
- Sale
At the time of grant, no taxability arises.
Vest:
At the time of vest, it is considered as employment income and employer is required to withhold tax at source (TDS). The perquisite income shall also form part of the annual Form No. 16 issued by employer.
FMV: At vest, Fair Market Value (FMV) of the stocks are liable to tax in India. For shares issued by a Company which is not listed in India, FMV as determined by a Category 1 merchant banker registered with SEBI is to be considered. The valuation is to be obtained as on the date of vest or any date within 180 days prior to the date of vest to be valid. – Rule 3(8) of Income tax rules, 1962
Exchange rate: For the purpose of employer withholding, the perquisite value determined in foreign currency is to be converted to INR basis SBI telegraphic transfer buying rate of the foreign currency as on the date of vest. – Rule 26 of the Income Tax Rules, 1962.
At the time of vest, the RSUs accrued and attributable to the employment with the Indian entity will be liable to tax in India.
Sale:
When vested shares are sold at a later date, capital gain taxation arises. As this is in the nature of personal income, employer will not deduct any taxes and taxes, as applicable are to be paid by way of advance tax or at the time of filing tax return.
Key factors in RSU taxation
Residential Status:
The taxation of foreign RSUs in India will also depend on the employee’s residency status. If the employee is an Indian resident, their global income is taxable in India. This includes the value of the RSUs, both when vested and when sold.
However, if the employee is a non-resident or a resident but not ordinarily resident, RSU vests relating to their overseas employment will not be taxable in India. Similarly, sale of RSUs outside India will not be taxable unless the sale consideration is received directly (first instance) in a bank account in India.
Taxable Events:
- Taxation at Vesting: When RSUs vest, employees are taxed on the fair market value of the shares. FMV is determined by Category 1 merchant banker registered with SEBI. and the exchange rate as on date of vest. This value is treated as a perquisite and taxed as part of the employee’s salary income, with employers deducting TDS accordingly.
There are three scenarios with vesting of shares:
♢ Sell to Cover: In order to avoid potential cash-flow issues, a portion of the shares are withheld/ sold by employer to cover the potential tax liability. At vesting, the employer deducts TDS under Section 192 on the fair market value of the exercised options. For example, if an employee receives 1,000 shares and falls into the 30% tax slab, the company sells 300 shares to cover the tax, leaving him with 700 shares.
♢ Same-day Sale: All vested shares are sold on the vesting day and applicable taxes are paid to the government. The employee receives the cash equivalent of the sales proceeds instead of actual shares.
♢ Upfront Payment: If the employee chooses this method, they pay the applicable tax upfront and retain all the shares.
Proceeds from RSU sales are reported in Form 16 and Form 12BA, showing the total vested shares.
- Taxation on Sale: When the vested RSUs are sold, the resulting capital gains are taxed based on the duration of holding. The holding period for RSUs extends from the date of vesting until the employee sells the shares. If the shares are sold within twenty-four months of vest, they are considered short-term capital gains and taxed at the individual’s applicable slab rates. If sold after twenty-four months, they are treated as long-term capital gains and taxed at a flat rate of 20% with indexation benefits.
- Taxation on Dividend receipt: Gross dividends are taxed at the applicable slab rate as income from other sources.
Tax Credit for Foreign Taxes:
India has Double taxation avoidance agreements (DTAA) with several countries to prevent double taxation of income. These agreements often provide relief by allowing taxpayers to claim credit for taxes paid in the foreign country.
When an Indian employee receives dividends from a U.S. corporation, they may be taxed at a 25% federal (DTAA) rate in the US. Indian tax residents must include the dividend income in their Indian tax return owing to global income taxation. In case of double taxation, they can claim relief under section 90 of the India-U.S. DTAA by evaluating claim of Foreign Tax Credit on the taxes paid in the overseas country. Additionally, Form 67 is to be filed prior to submitting their tax return to get credit for U.S. taxes paid.
To claim tax credit in India for foreign taxes paid, one must submit a statement of foreign income and the foreign tax deducted or paid on that income in Form 67. Additionally, the details of tax relief claimed for taxes paid outside India must be reported in the ‘Schedule TR’ section of the ITR to avoid double taxation.
Exchange Rate Conversion:
To convert foreign currency into Indian rupees, the State Bank of India’s Telegraphic Transfer Buying Rate (SBI TTBR) is used. This exchange rate is determined based on the last date of the previous month in which the capital gain occurs. For instance, if shares are sold on May 15, 2024, the exchange rate from April 30th, 2024, would be used.
Disclosures and Compliance:
Income tax return forms now require several disclosures for foreign assets. If an employee holds RSUs from a foreign company, they must disclose these holdings under Schedule FA of their tax return. These disclosure requirements apply to resident taxpayers. However, please note that for foreign asset reporting, reporting for the calendar year and not financial year is to be done.
Additionally, for individual’s with taxable income in excess of INR 50 lakhs the value of shares as on March 31 is also required to be reported.
Foreign RSUs can be a valuable component of compensation for Indian employees working for multinational companies. However, understanding the tax implications is crucial to avoid surprises and ensure compliance with Indian tax laws. By staying informed about the latest updates and seeking professional advice when needed, taxpayers can navigate the complexities of foreign RSU taxation in India effectively.
BCL is a team of experts specializing in international taxation, from whom such professional guidance can be availed. Their personalized approach ensures compliance with Indian tax laws and helps optimize tax liabilities. For tailored advice on foreign RSU taxation, consider consulting BCL’s seasoned professionals.
