RSU Taxation for NRIs: Guide for Indian Professionals in The US

Understanding Restricted Stock Units (RSUs) for NRIs

What are Restricted Stock Units?

Restricted stock units represent your company's promise to grant you shares at a future date once specific conditions are met. You receive no actual shares at grant. Instead, you get a commitment that converts into stock ownership after vesting. This is different from immediate stock ownership because RSUs function as deferred compensation without any upfront cost to you.

Your company determines the number of shares each RSU represents and sets the vesting schedule. These units carry no voting rights. You won't receive dividend payments until the shares are earned and issued. The standard vesting period ranges from three to five years, though your specific timeline depends on your grant agreement.

RSU vs Stock Options: Key Differences

The fundamental difference lies in how you acquire ownership. Your company grants shares without requiring payment with RSUs. Stock options give you the right to purchase shares at a predetermined exercise price.

RSUs: Grant → Vesting → Receive shares → Sale

Stock Options: Grant → Vesting → Exercise (purchase) → Sale

Your tax timing is different by a lot between the two. RSUs trigger automatic taxation when they vest based on fair market value and give you no control over the tax event. Stock options allow discretion in timing your tax obligation because you choose when to exercise after vesting.

Value retention presents another difference. RSUs maintain some value unless your company's stock price drops to zero. Stock options become worthless if the stock price falls below the exercise price. If you hold options with a strike price of $50 but the stock trades at $40, exercising would result in a loss.

How RSUs Work: Grant to Vesting to Exercise

Your RSU experience begins on the grant date when your company promises restricted shares. The grant agreement outlines the total units awarded and vesting conditions. You own nothing at this stage and face no tax liability.

Vesting occurs through time-based schedules or performance milestones. A typical four-year time-based schedule might vest 25% annually. You'd receive one-quarter of your total grant each year. Performance-based vesting requires meeting specific company or individual goals before shares transfer to you.

Settlement happens when vested RSUs convert into actual shares. Some companies settle immediately upon vesting. Others batch settlements quarterly for administrative purposes. The fair market value at settlement becomes taxable income, and your employer withholds a portion of shares to cover taxes.

After settlement, you receive full ownership and can sell the shares or hold them for potential appreciation. Any price increase from the vesting date creates a capital gain. A decline might leave you with shares worth less than the taxes you paid. Your employment termination halts vesting unless your agreement specifies otherwise, such as in early retirement scenarios.

RSU Taxation in India: When and How Much You Pay

No tax applies when your company grants RSUs to you. The taxable event occurs only when these units vest and convert into actual shares. Understanding the taxation mechanics at each stage helps you plan for liabilities and avoid compliance issues.

Tax at Vesting: Perquisite Income Treatment

The fair market value of shares on your vesting date is taxable as perquisite income under the salary head. This amount gets added to your total salary income and taxed according to your applicable income tax slab rates. Your Indian employer must deduct TDS on this perquisite income and deposit it with the income tax department.

You face this tax liability whether you sell the shares right away or hold them. To name just one example, if 250 RSUs vest when the fair market value stands at ₹500 per share, your taxable perquisite income equals ₹1,25,000. This gets taxed at your marginal rate, which could range from 5% to 30% depending on your total income.

Three settlement scenarios affect your share receipt. Your employer withholds a portion of shares to cover TDS obligations in a sell-to-cover arrangement. A same-day sale converts all vested shares to cash after tax payment. You pay taxes from other sources and retain all shares with upfront payment.

Tax on Sale: Capital Gains Rules

Capital gains tax applies when you sell vested shares. The gain is calculated as the difference between your sale price and the FMV at vesting. Your holding period starts from the vesting date, not the grant date.

Short-term capital gains apply if you sell within 24 months of vesting for US stocks not listed on Indian exchanges. These gains are taxed at your income slab rates. Long-term capital gains are taxed at 12.5% without indexation benefits if you hold shares beyond 24 months. Take the earlier example: if you sell 250 shares at ₹600 each after vesting at ₹500, your capital gain equals ₹25,000.

How Residential Status Affects Your Tax Liability

Your residential status determines the scope of taxation. Your global income is taxable in India if you qualify as a Resident and Ordinarily Resident (ROR). This includes RSU vesting and sale gains. Then all RSU-related income requires reporting and tax payment in India.

RSU vesting related to overseas employment is not taxable in India if you are an NRI or Resident but Not Ordinarily Resident (RNOR). Sale of RSUs outside India is also not taxable unless sale proceeds are received in your Indian bank account.

You can check your residential status using the - Residential Status Calculator

Fair Market Value Calculation for US Stocks

FMV must be determined by a Category 1 merchant banker registered with SEBI for shares issued by companies not listed in India. The valuation must be obtained on the vesting date or within 180 days prior to that date. Use the SBI telegraphic transfer buying rate applicable on the vesting date to convert foreign currency values to INR.

US and India Tax Overlap: Avoiding Double Taxation

When US employers withhold taxes on your RSU vesting and India taxes the same income, you face double taxation. The India-USA tax treaty provides relief mechanisms to ensure you don't pay tax twice on similar income earned from restricted stock units.

Understanding the India-USA Tax Treaty (DTAA)

The Double Taxation Avoidance Agreement between India and the United States came into force on December 18, 1990. Article 25 of this treaty addresses relief from double taxation and allows Indian tax laws to provide credit against Indian tax for amounts paid to the United States.

The treaty applies to residents of both countries, though the US retains the right to tax its citizens and residents as if the treaty didn't exist. Then you must determine your residential status in both countries before claiming treaty benefits. India allows a deduction equal to the income tax paid in the United States, but such deduction cannot exceed the Indian tax calculated on that foreign income.

Claiming Foreign Tax Credit in India

Foreign Tax Credit operates under Sections 90 and 91 of the Income Tax Act. Section 90 applies when India has a DTAA with the foreign country, while Section 91 covers scenarios without a treaty. The credit amount equals the lower of two values: tax paid in the foreign country or tax payable on that income in India.

If US tax withheld equals ₹1,09,000 and Indian tax liability on the same RSU income amounts to ₹1,50,000, you can claim ₹1,09,000 as foreign tax credit. So you pay only the difference of ₹41,000 in India. The credit prevents double taxation but doesn't eliminate your obligation to report and pay the higher tax between the two countries.

Filing Form 67 for Tax Relief

Form 67 must be filed before submitting your Income Tax Return to claim foreign tax credit. You must file Form 67 before December 31, 2024 for Assessment Year 2024-25. The form has four sections: Part A with basic information and foreign income details, Part B covering refund of foreign tax, a verification section and attachments for tax payment proof.

You need a Digital Signature Certificate or Electronic Verification Code to submit Form 67. The details in Form 67 must match with Schedule FSI in your ITR. Filing after the assessment year ends disqualifies you from claiming credit, though you may apply for condonation with valid reasons.

W-2 Reporting and Indian Tax Returns

Form W-2 summarizes wages earned and taxes withheld by your US employer during the calendar year. Employers issue this form to employees earning USD 600 or more. Form W-2 confirms US income tax, Social Security tax and Medicare tax withholdings for NRIs.

Report foreign income in Schedule FSI and claim relief in Schedule TR when preparing your Indian tax return. Schedule FSI requires country code, taxpayer identification number, income earned outside India, taxes paid abroad and the relevant DTAA article. The information flows to Schedule TR where your foreign tax credit reduces overall tax liability.

Conclusion

You now have everything you need to handle RSU taxation as an NRI working in the US. Report perquisite income at vesting and calculate capital gains on sale. Claim foreign tax credits to avoid double taxation.

Stay compliant with Schedule FA disclosures and maintain full documentation of all RSU transactions. The penalties for non-disclosure are severe, but proper record-keeping protects you.

Use the tax planning strategies above to minimize your liability. Time your sales with care, especially for long-term capital gains at 12.5%. Your RSU compensation represents substantial value, so don't let avoidable tax mistakes erode those earnings.