Restricted Stock Units (RSU): Taxation, Pros & Cons Explained

Imagine you are working for a big tech company like Google or Microsoft. Along with your monthly salary, your boss says, Since you are doing a great job, we are giving you 100 shares of the company. But there is a catch: you can’t have them today. You will get them only if you stay with us for the next three years. These promised shares are what we call Restricted Stock Units (RSUs).

Unlike a regular bonus where you get cash in your bank account, an RSU is a commitment. It’s like a fruit tree planted in your name in the company’s garden. You can’t pick the fruit (the shares) immediately; you have to wait for the vesting period to end. Once that time passes, the fruits are yours to keep or sell. However, the taxman in India views these fruits as a part of your income, and he wants a slice of them twice, once when you get the shares and once when you sell them for a profit.

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What are Restricted Stock Units (RSUs)?

RSUs are a form of equity compensation. Instead of giving you a cash bonus, the company gives you units that represent ownership.

• Grant Date: The day the company promises you the shares. No tax is paid here.
• Vesting Period: The waiting period (e.g., 4 years).
• Vesting Date: The day the restriction is lifted and the shares finally belong to you. This is a major tax event.

How are RSUs Taxed in India? (2026 Rules)

In India, RSUs are taxed at two distinct stages. It is important to remember that most RSUs are from foreign companies (like US-based firms), which adds a layer of complexity regarding exchange rates and foreign asset reporting.

Stage 1: At the Time of Vesting (As Salary)

The moment your RSUs vest and convert into actual shares, the Indian government treats them as a Perquisite (a non-cash benefit). This value is added to your total salary for the year.

• Taxable Value: Fair Market Value (FMV) of the shares on the vesting date.
• Tax Rate: Your applicable Income Tax Slab rate (up to 30% + surcharge/cess).

Example: If 100 shares vest and the market price is ₹5,000 per share, your salary for that month increases by ₹5,00,000 on paper. Your company will likely sell some of these shares automatically to pay your tax (this is called Sell to Cover).

Stage 2: At the Time of Sale (As Capital Gains)

If you decide to hold the shares after vesting and sell them later at a higher price, you pay tax on the profit you made after the vesting date.

• Taxable Value: Sale Price – FMV on Vesting Date.

• Tax Rate (2026):

  • Short Term: If held for less than 24 months (for foreign/unlisted shares), taxed as per your Slab Rate.
  • Long Term: If held for more than 24 months, taxed at 12.5% (as per latest 2024-2026 budget updates).

Quick Comparison: RSU Tax Summary 2026

Event

Tax Category

Taxable Amount

Rate (Approx.)

Granting

None

Nil

0%

Vesting

Perquisite (Salary)

Full Market Value of shares

5% to 30% (Slab)

Sale ( < 24m)

STCG

Profit made after vesting

Your Slab Rate

Sale ( > 24m)

LTCG

Profit made after vesting

12.5%

Advantages of RSUs

1. Guaranteed Value: Unlike Stock Options (ESOPs), which can become worthless if the stock price falls below a certain level, RSUs almost always have some value as long as the company is alive.
2. No Upfront Cost: You don't have to pay a single Rupee to buy these shares. They are given to you for free as part of your hard work.
3. Alignment with Company: When the company does well, you do well. If the stock price doubles, your wealth doubles.
4. Simple Process: You don't need to decide when to exercise them. They vest automatically based on the schedule.

Disadvantages of RSUs

1. Forfeiture Risk: If you leave the company before the vesting date, you lose all your unvested shares. It is often called a Golden Handcuff.
2. Immediate Tax Burden: You have to pay tax the moment they vest, even if you don't sell the shares. This can sometimes lead to a cash flow problem where you owe tax but don't want to sell your shares yet.
3. Concentration Risk: If a large part of your wealth is in your company's RSUs, and the company hits a rough patch, both your salary and your savings could drop at the same time.
4. Compliance (Schedule FA): If you hold shares in a foreign company (like Apple or Meta), you must disclose them in Schedule FA of your Indian Income Tax Return. Forgetting this can lead to a heavy penalty of ₹10 Lakhs.