Income tax implications on RSUs or ESPPs
A lot of individuals are employed with MNCs headquartered in countries other than India. Whether this is Google, Amazon, Walmart, Shell, HP, Dell, Accenture or any other listed company - these companies offer Restricted Stock Units (RSUs) or Employee Stock Payment Plans (ESPPs) as part of their compensation package.
What are the income tax implications on RSUs? How are my stock grants taxed? How to disclose my RSUs disclosed in Schedule FA? So many questions - let's dive right in!
First, let's address the elephant in the room - "India and XYZ country have a DTAA. So I don't need to pay tax on my RSUs right?". Simple answer? This is completely wrong. If your advisor or friend tells you this, run like hell. We actually covered exactly this in another article on How does a DTAA work.
Salary/ Perquisites
This is the part most people actually get right. The ESPPs or RSUs received by you as part of your salary is taxable as perquisites under income from salary. This will show up in your Form 16. There's some backend currency conversion going on but we won't bore you with that in this article - your Company will take care of this, you don't need to worry about it.
For the purpose of this article, let's assume you are an employee of Amazon India and receive shares of Amazon Inc as part of your compensation. You receive 10 shares and fair market value per share on grant date is INR 2,25,000.
Income of INR 22,50,000 (INR 2,25,000 x 10 shares) will be taxed as income from salary.
Now, for the sake of completeness, let's assume that instead of getting these 10 shares for free, you are required to pay INR 1,00,000 per share i.e. you get the shares at a discounted price.
Income of INR 12,50,000 [INR (2,25,000 - 1,00,000) x 10 shares] will be taxed as income from salary.
Dividend
Dividend will be taxable in the US. As per the India-US DTAA, dividend will be taxable in the US at the rate of 25%.
Just like the US, Dividend will be taxable in India as well. In India, the tax will be payable at slab rates. You will get foreign tax credit for this tax paid in the US while filing Indian Tax Returns but Foreign Tax Credit is rarely one to one.
Read how Foreign Tax Credit works here.
Conversion of USD into INR:
The SBI TT buying rate is used for conversion of USD into INR. The rate on the last day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the company.
One quick example to understand this:
Example: Mr. India invested in Walmart stock and received dividend of USD 10 on 15 May 2020. Rate used is as under:
Dividend received on 15 May 2020. SBI TT Buying rate as on 30 April 2020 will be used.
See our article on Tax on foreign stocks for more in-depth details on how to report dividend.
Capital Gains
Assuming you are a Non-Resident Alien for US Tax purposes, there is no capital gains tax in the US. This applies for both short term and long term capital gains (we're avoiding going into how stocks are classified as short term or long term for this reason).
If your Residential Status as per the Income Tax Act is Resident, your worldwide income is taxable in India. This would mean that Capital Gains earned on US stocks will be taxable in India.
The below chart describes how tax will work on long term and short term US shares:
Slab rates for individuals are available here.
Conversion of USD into INR:
The SBI TT buying rate is used for conversion of USD into INR. The rate on the last day of the month immediately preceding the month in which purchase/ sale takes place.
Example: Mr. India invested in Disney stock at USD 117.3 on 29 May 2020. He sells his holding on 31 December 2020 when Disney stock price is USD 150.
Stock was purchased on 29 May 2020. SBI TT Buying rate as on 30 April 2020 will be used.
Stock was sold on 31 December 2020. SBI TT Buying rate as on 30 November 2020 will be used.
Let's assume the SBI TT Buying rates are as follows:
30 Apr 2020: USD 1 = INR 75
30 Nov 2020: USD 1 = INR 80
Short Term Capital Gains are calculated as under:
Note: It is also possible to take a view that "Capital Gains" should be converted at the SBI TT rate and not the individual purchase and sale amounts.
See our article on Tax on foreign stocks for more in-depth details on how to report capital gains.
Reporting in Schedule FA
We know what you're thinking - "yeah yeah yeah. We've read Galactic Advisors' earlier articles. Just tell us how to report in Schedule FA". Your wish is our command.
First up, note that Schedule FA is a complex beast. There's no clarity from the Income Tax Department on how assets should be reported. Also note that how assets are reported in Schedule FA may change based on the facts of each case. It's really difficult to give a definitive guide to this.
However, in general, below is the best practice agreed upon by most tax advisors:
What part of Schedule FA do you report your RSUs or ESPPs? A3 - Foreign equity and debt interest? B - Financial interest in any entity outside India? D - Any other capital assets outside India? Unfortunately, this isn't a black and white answer. This involves a discussion regarding what has been done in previous years. You do not want to change positions from year to year (unless what was done earlier is completely wrong). A lot of articles and opinions seem to suggest you can report it under D. Other Assets since reporting requirements are lower in said schedule. We generally do not subscribe to this view.
Calendar Year reporting Note that reporting in Schedule FA is based on the accounting year followed by the country in which asset is held. This means that if your shares are of a US company, you will have to follow calendar year basis for reporting.
Initial Value of Investment The value of your investments (in foreign currency) as on the initial date of vesting multiplied by SBI TT/ RBI reference rate on said date. Now, problem might be that your initial investment may have been years ago and you may not have reported the Foreign Asset all these years. What do you do in this case? Contact Galactic Advisors! ;)
Peak Value of Investment This is the highest value of your investment during the Calendar Year. If you are reporting assets for FY 2020-21, consider Calendar Year 2020. Highest value in USD will be multiplied by SBI TT/ RBI reference rate on said date
Closing Value of Investment Value of investments as on 31 December multiplied by SBI TT/ RBI reference rate said date.
Should I report the Company name (Alphabet, Amazon, etc) or the Broker name (Morgan Stanley, E-trade, etc). This is a judgement call to be honest. Work with your CA and determine which is the best option in your case - we've gone both ways on this depending on the facts of the case.
Reporting of income and sales Any income (say dividend) or sale of RSUs is required to be reported under schedule FA. Ensure you don't miss out on this part. We've had a lot of people reach out to us after making this mistake.
Do I have to create separate line items for each purchase/ vesting? Can I show all RSUs under one line in Schedule FA? Again, unfortunately, this is a judgement call. Work with your CA to determine what works best in your case.
While we have tried to simplify a lot of aspects above, some of the items may be an over-simplification of sorts. We've not even got into the complexity that is Schedule FSI. Ensure you work with your tax advisor to report your RSUs/ ESPPs appropriately.
Still confused? Use the contact us page to post your queries. We'll be happy to help!
