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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!


  1. Salary/ Perquisites

  2. Dividend

  3. Capital Gains

  4. Reporting in Schedule FA


How does a DTAA work

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.