What Are Restricted Stock Units (RSUs)? Meaning, How They Work, Taxation

Getting a salary is great, but getting a share in the company you work for in addition to the salary is even better. This is why RSUs have become an integral part of employee compensation. However, to get RSUs, you need to stay with the company for a certain period before the shares become completely yours. 

Let us explain RSUs in a simple way and understand how they work from the day they are granted to the day you eventually sell them.

What are Restricted Stock Units (RSU)?

A Restricted Stock Unit is a promise from your employer to give you company shares at a future date, provided you stay in the company and meet certain conditions. 

Companies use RSUs mainly to retain talent. A cash bonus is a one-time thing, but RSUs tie your financial upside to how long you stay and, in many cases, to how well the company performs. This is especially common among large tech firms, US-headquartered companies with Indian subsidiaries, and increasingly, homegrown startups. 

How Do RSUs Work?

1. The Grant

This is the day your employer allots you a specific number of units, say 200 RSUs. At this point, you own nothing yet. It is just a commitment on paper, recorded in your grant letter, along with the vesting schedule.

2. The Vesting Schedule

This is when you start receiving the shares, but it happens gradually over time. For example, a 4 -year vesting schedule will give you 25% of the shares each year. Some companies may follow a different schedule, such as giving a larger portion upfront and then the rest of the month. 

You might come across the word ‘cliff’, which simply means you have to stay with the company for a certain period before you receive any shares. 

So if you are granted 200 RSUs with a four-year annual vesting schedule, you would get 50 shares credited to you at the end of year one, another 50 at the end of year two, and so on. 

3. Settlement

Once units vest, they are converted into actual shares and credited to your demat or brokerage account, if the company is listed.

Taxation of RSUs 

Stage 1: Tax at Vesting (Perquisite Tax)

The moment your RSUs vest, the Income Tax Department treats the fair market value (FMV) of those shares as a “perquisite”, a benefit received from your employer.

This value gets added to your salary income for that financial year and taxed at your applicable income tax slab rate.

Say 50 RSUs vest for you in a year, and the FMV on the vesting date is ₹3,000 per share. 

This implies ₹1,50,000 will be added straight to your taxable salary for that year, even though you have not sold a single share.

For listed companies in India, your employer usually deducts TDS on this perquisite value directly through payroll, so it also reflects in Form 16. 

Stage 2: Tax at Sale (Capital Gains)

Once you sell the vested shares, a second tax liability is generated, i.e., capital gains tax. 

This is calculated on the difference between your selling price and the FMV on the vesting date 

The classification depends on the holding period and whether the shares are listed in India or abroad:

• Indian listed shares: 

Held for more than 12 months before selling will be Long-Term Capital Gains (LTCG), taxed at 12.5% above the ₹1.25 lakh exemption threshold. 

Sold within 12 months = Short-Term Capital Gains (STCG), taxed at 20%.

• Foreign shares (like US-listed stock from a US parent company):

The holding period for long-term classification is 24 months instead of 12 months. Long-term gains are taxed at 12.5% without indexation, and short-term gains get added to your income and taxed at the slab rate.

Why Do Companies Offer RSUs?

• It keeps people from leaving: Since RSUs vest over three or four years instead of being credited to your account on day one, quitting early means walking away from money that has not vested yet. Companies know this, and it is one of the reasons people stay a year longer than they planned to.
• It links your paycheck to the company’s performance: When part of your compensation is in company stock, you are not just an employee anymore. If the company does well and the stock rises, your RSUs are worth more without your salary changing at all. Employers like this because it motivates people to think and work like owners, not just staff.
• It rewards long-term thinking: A cash bonus is a one-time pat on the back. RSUs, on the other hand, keep paying over years, which pushes employees to care about where the company is headed two or three years down the line, not just this quarter’s targets.

RSUs vs. ESOPs: A Table of Differences

S. No	Basis	RSUs	ESOPs
1	What do you get?	Company shares that you receive after they vest	The right to buy company shares later at a fixed price
2	Do you have to pay?	No, you do not pay to receive the shares	Yes, you have to pay the fixed exercise price to buy the shares
3	When are they taxed?	Usually, when the shares vest, and again when you sell them	Usually, when you exercise the options, and again when you sell the shares
4	Upfront cost	No upfront payment is required	You need money to buy the shares when you exercise the options
5	Risk	Generally lower because you receive the shares once they vest	Generally higher because the options may not be worth exercising if the share price falls below the exercise price
6	Commonly offered by	More common in large companies and established businesses	Commonly offered by startups and growing companies
7	Impact on the company	Shares are issued when the RSUs vest	Shares are issued when employees exercise their options, making the process a little more complex

RSUs from Foreign Employer

If the RSU comes from a foreign employer or a foreign parent company, and you have shares in a foreign brokerage or custodial account, you must report the shares on Schedule FA (Foreign Assets) in your income tax return, even if you do not sell anything in the year. 

This is irrespective of the amount involved, and violation of the non-disclosure of foreign assets is subject to strict punishment under the Black Money Act. 

Many salaried employees are not aware of this until the assessment officer draws their attention to it.

Conclusion 

To sum it up, RSUs can be a great way to build wealth, especially if you understand how they work. But taxes can sometimes annoy you by surprise because you may have to pay tax when the shares vest, even if you have not sold them yet.

A simple way to stay prepared is to keep track of your vesting dates and the share value on each vesting date. You will need this information later when you sell the shares and calculate your capital gains. 

If you have RSUs from a foreign company, multiple vesting dates, or several share sales, calculating the tax can get a little complicated. In such cases, it may be a good idea to speak to a tax professional, especially when filing your ITR. 

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