Tax on RSU in India

Overview

Incentivizing the employees and keeping them motivated has always been a challenge for the start-ups. With the business environment becoming more and more fast paces and competitive each day, it becomes even more important to attract, retain and satisfy the needs of the workforce. To meet this very need start-ups are now coming up with innovative methods of compensating the employees. This is where the role of share based payments comes into play offering benefits to both employees and the employer. While on one side, share based payments incentivizes the employees to stay with the organisation for a long time, on the other side, share based payments are often utilised by start-ups during times of low liquidity. These share based incentives act as a morale booster and also develops a sense of determination towards the job which helps towards the success of the start-ups. Share based payments offer multi-fold benefits which in recent times has led to well-established companies offering them as a part compensation packages. One such share based payment is Restricted stock units. 

What is Restricted Stock Unit (RSU)

RSU or Restricted Stock Unit is a unique form of compensation offered to employees where employees are awarded stocks or cash equivalent to value of stock as compensation upon satisfying some vesting condition of some specified period or on achieving some set milestone. RSU is now becoming one of the most popular ways for incentivizing the employees and is getting increasingly adopted by the companies. 

RSU can be performance based or time-based or a composition of both. Shares awarded can either be directly from the employer’s company or from the holding company of the direct employer. RSU does not have any exercise price meaning the employee does not have to pay anything to receive the shares. Employees are also allowed to sell the shares at their discretion unless and until they are still within the predetermined selling period.

Tax on RSU in India

Understanding complexities related to taxation is important for making informed decisions. Tax planning is essential to ensure that ESOP or RSU tax in India does not become a burden thus, understanding the tax implications is crucial for any start-up and even for the employees.

Tax on RSU in India differs for start-ups and their employees. RSU stocks complement the salary packages of the employees and hence these are not taxed as salary for the employees. These are treated as capital gains due to appreciation in the value of stocks. For employers, it is considered as the cost incurred to compensate the employees. Thus, tax on RSU in India is not the same for the employer and the employee. 

Tax on RSU in India for Employer

Companies offer the RSU stocks to employees for no cost i.e. employees are not required to pay any amount on the exercise of RSUs. This is a benefit for the employees but for the employer, this is the cost of compensating the employees through equity based compensation plans. The company bears the expense by issuing the RSUs free of cost thus, increasing its employee compensation expense and this cost is a tax advantage for the companies as the company can get tax reduction for the year in which the RSU stocks are exercised. Even if the company awards cash instead of just awarding RSUs, still RSU tax liability will be reduced. Thus, just like ESOPs, RSUs also provide reduction in tax liability.

Tax on RSU in India for Employee

Gains received from RSUs are treated as capital gains for the employees and these gains are taxable once the stock units are sold by the employees or cash equivalent is received by the employee. RSU Taxation in India is divided into two parts: at the time of Exercise and at the time of Sale

RSU Tax in India at time of vesting

When the RSUs are vested to the employees, then the employer is liable to deduct the tax on the value of the RSUs as at the date of vesting. The fair value or market value of the RSUs as at date of vesting is added as the perquisite in the salary component of the employee and a TDS as per the tax slab rate is then applicable on the value of the RSUs. In other cases, if cash is received by the employee, then it will also be liable for tax as per the relevant Income Tax slab in which an employee falls. Thus, in short, exercising of RSUs increases the tax liability of the employees.

Amendment for RSU Tax in India Union Budget 2020

According to an amendment in the budget, any employee who has exercised the option from April 1, 2020, is not required to pay tax at the time of exercising of the ESOP or RSU. Employers can defer the deduction of TDS on the difference of fair value less exercise price of share to the earlier of the following events:

• Expiry of 5 years from the year of ESOP or RSU allotment
• Date of ESOP or RSU sale by the employee
• Date of employee leaving the company

RSU taxation at the time of Sale of the equity shares:

Taxation at the time of sale of RSUs, can be again be seen from two perspectives: whether the stock is listed on any stock exchange like BSE, NSE or whether the stock is unlisted

RSU taxation at the time of sale:

Note: There is no option for the employees to not exercise the RSU i.e. the employees cannot reject the exercise of the RSUs. The employer will have to have awarded the RSUs or have to give cash equivalent to the employees.

Conclusion

Offering benefits to employees act as incentives for employees to give their best to the organization but understanding the landscape of any Employee Based Benefits becomes crucial to make informed decisions. It has a major role not only to comply with the RSU taxation in India laws but also to design future financial plans. Proper RSU tax planning and financial planning can significantly contribute to the generation of wealth and capital. Expert’s guidance is advised to be followed for proper structuring and implementation of Employee Benefit Plans and tax laws.