Restricted Stock Units (RSUs) have become a common component of compensation, particularly for professionals working with multinational organisations. While clients often view RSUs as just another employee benefit, from a tax and compliance perspective, they involve multiple layers-salary taxation, capital gains computation, and foreign asset reporting.
In practice, RSU-related income tax filings frequently throw up similar challenges. Below are some practical observations that may help professionals handle such cases more smoothly and avoid common pitfalls.
1. Benefit / Transaction History - Why Account Summary Is Not Enough
Clients often share only the broker or plan administrator's account summary. While this provides a snapshot of holdings, it is not sufficient for tax reporting.
What is actually required is the detailed benefit or transaction history, which captures:
- Grant date
- Vesting date
- Number of shares vested
- Shares withheld or sold
- Sale proceeds, if any
This level of detail is essential for accurate reporting of perquisite income and capital gains.
2. Cost of Acquisition - Aligning Salary and Capital Gains
For RSUs, the fair market value (FMV) on the vesting date is critical:
- It is taxed as a perquisite under salary income and reflected in Form 16
- The same FMV becomes the cost of acquisition for capital gains purposes
Ensuring consistency between Form 16 and capital gains computation is key to avoiding mismatches and potential notices.
3. Foreign Asset Disclosure - Often Missed, Always Important
Once RSUs are vested, they qualify as a foreign asset and must be disclosed in Schedule FA (A3 - Foreign Assets), even if:
- The shares are not sold during the year, or
- The client continues to hold them
This disclosure requirement is frequently overlooked and needs careful attention.
4. The "Double Taxation" Misconception in Sell-to-Cover Transactions
Clients often worry that sell-to-cover transactions result in double taxation. In reality, this is a misconception.
Here's how it works:
- On vesting, a portion of shares is withheld and sold on the same day to meet tax obligations
- The value of vested shares is taxed as salary income in India and reflected in Form 16, with TDS deducted
- Since the sale happens immediately on vesting, no capital gains arise
- No tax is paid in the US on these RSUs; taxation occurs only in India
Therefore, there is no double taxation, only a lack of clarity around the process.
Conclusion
RSUs sit at the intersection of salary income, capital gains, and foreign asset disclosure, making them a recurring area of confusion for clients. Clear explanations, correct documentation, and consistency in reporting go a long way in handling these cases effectively.
Sharing practical insights and standardised approaches as professionals helps ensure smoother compliance and stronger client confidence.
The author, CA Aishwariya Rajagopal, is a Chartered Accountant with experience in taxation, accounting, and statutory audit, working closely with professionals and businesses on practical compliance matters. She writes regularly on contemporary tax and finance topics with a focus on clarity and real-world application.
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