Restricted Stock Units – When, Where and How is it taxable?
Restricted Stock Units (RSUs) are performance-based employee benefit by means of stocks granted by the company that entitles the employees to enjoy the shares of the company (or cash equivalent of the shares) on the exercise date, provided that the conditions pertaining to performance and duration of work have been fulfilled over the vesting period. The shares granted under RSUs can be from the direct employer’s company or from the holding company of the direct employer (Here, the shares can be issued either from a company incorporated in India or from a company incorporated abroad).
It should be noted that RSUs do not have an exercise price since the employees are granted shares (or cash equivalent of the shares) directly with restrictions. Whereas, under an Employee Stock Option Plan (ESOP) and an Employee Stock Purchase Plan (ESPP), the employer shall predetermine the exercise price for the award. The exercise price under the ESOP shall be determined as a discounted price based on the fair market value on the exercise date, and the exercise price under the ESPP shall be predetermined on the grant date.
Important Definitions
1. Grant Date: The date on which the option to exercise the award after the vesting period was given to the employee. (Here, the term “award” refers to the “right to purchase shares or stock options of the company or the right to receive cash equivalent to the shares or stock options value of the company.”)
2. Vesting Period: The time between the date an award is issued and the date the award will vest if certain conditions are met is referred to as the vesting period. During the vesting period, the employee has no right to the award. Generally, the RSUs vesting period can be single or multiple for a grant.
3. Vesting date: The date on which the employee will be entitled to the benefit of ownership of the award if predetermined conditions are met. The employee shall be eligible to exercise the award allotted under the grant on or after the vesting date.
4. Exercise Price: The predetermined price at which the employee will be eligible to purchase the shares or stock options granted at a later date. The exercise price is the amount that the employees will pay in exchange for the vested shares or stock options. However, there is no exercise price for the RSUs.
5. Exercise period: The time between the date the shares are vested and the date the exercise period expires. The employee has the right to exercise the award allotted on the grant date.
6. Exercise date: The date on which the employee exercises the award. It needs to be noted that the vesting date can be different from the exercise date.
Taxation of Restricted Stock Units in India
RSUs are taxable in two instances in India:
The RSU perquisite is taxable based on the period of stay during the vesting period and resident status at the time of the grant of option. Typically, the country in which the employee served at the time of RSU grant may be different from the country in which the vesting and exercise occur, resulting in a conflict over the apportionment of taxing the perquisite between the countries. The value of perquisites in such cases shall be determined on a pro-rata basis based on the period of stay during the vesting period.
Application of Double Tax Avoidance Agreement (DTAA) for RSU taxation
Where an assessee is a resident and an ordinary resident, the global income earned and received should be taxable in India. This would amount to double taxation on the same amount if the income was subject to tax in the other country as well.
However, in this case, he must pay foreign taxes on the income earned abroad in that particular country. In such cases, based on the DTAA between the foreign country and India, he can claim a foreign tax credit for such taxes paid abroad in proportion to the income chargeable to tax in India when filing his income tax returns.
In such a situation, where an employee exercise shares under an RSU, he needs to pay tax on the perquisites in the foreign country (i.e., the country in which the taxable RSU perquisite arises) and claim a foreign tax credit in India against the income chargeable to tax in India.
Foreign tax credit (FTC) is a non-refundable tax credit for income tax payments made to a foreign government as a result of foreign income tax withholdings. The assessee may claim relief for taxes paid on income earned in a foreign country that is also taxed in his or her home country.
Important Definitions
1. Grant Date: The date on which the option to exercise the award after the vesting period was given to the employee. (Here, the term “award” refers to the “right to purchase shares or stock options of the company or the right to receive cash equivalent to the shares or stock options value of the company.”)
2. Vesting Period: The time between the date an award is issued and the date the award will vest if certain conditions are met is referred to as the vesting period. During the vesting period, the employee has no right to the award. Generally, the RSUs vesting period can be single or multiple for a grant.
3. Vesting date: The date on which the employee will be entitled to the benefit of ownership of the award if predetermined conditions are met. The employee shall be eligible to exercise the award allotted under the grant on or after the vesting date.
4. Exercise Price: The predetermined price at which the employee will be eligible to purchase the shares or stock options granted at a later date. The exercise price is the amount that the employees will pay in exchange for the vested shares or stock options. However, there is no exercise price for the RSUs.
5. Exercise period: The time between the date the shares are vested and the date the exercise period expires. The employee has the right to exercise the award allotted on the grant date.
6. Exercise date: The date on which the employee exercises the award. It needs to be noted that the vesting date can be different from the exercise date.
Taxation of Restricted Stock Units in India
RSUs are taxable in two instances in India:
- When shares are allotted to the employee after he has exercised the option on completion of the vesting period,
- When the employee opts to sell the allotted shares under the RSU
The RSU perquisite is taxable based on the period of stay during the vesting period and resident status at the time of the grant of option. Typically, the country in which the employee served at the time of RSU grant may be different from the country in which the vesting and exercise occur, resulting in a conflict over the apportionment of taxing the perquisite between the countries. The value of perquisites in such cases shall be determined on a pro-rata basis based on the period of stay during the vesting period.
Application of Double Tax Avoidance Agreement (DTAA) for RSU taxation
Where an assessee is a resident and an ordinary resident, the global income earned and received should be taxable in India. This would amount to double taxation on the same amount if the income was subject to tax in the other country as well.
However, in this case, he must pay foreign taxes on the income earned abroad in that particular country. In such cases, based on the DTAA between the foreign country and India, he can claim a foreign tax credit for such taxes paid abroad in proportion to the income chargeable to tax in India when filing his income tax returns.
In such a situation, where an employee exercise shares under an RSU, he needs to pay tax on the perquisites in the foreign country (i.e., the country in which the taxable RSU perquisite arises) and claim a foreign tax credit in India against the income chargeable to tax in India.
Foreign tax credit (FTC) is a non-refundable tax credit for income tax payments made to a foreign government as a result of foreign income tax withholdings. The assessee may claim relief for taxes paid on income earned in a foreign country that is also taxed in his or her home country.
