Understand how RSUs work, their benefits, tax implications, and how they compare to stock options.
Restricted Stock Units (RSUs) are increasingly used by companies as part of employee compensation packages. Especially in start-ups, tech companies, and MNCs, RSUs offer employees an opportunity to earn equity in the company over time. This guide explains the structure, benefits, and tax treatment of RSUs in simple terms, tailored for individual investors and salaried professionals.
Restricted Stock Units (RSUs) are a form of equity compensation awarded to employees. These are company shares promised to the employee but subject to a vesting schedule—meaning the shares are granted over time or upon achieving specific milestones. RSUs are not tradable until they are vested and settled, at which point they convert into actual company stock.
RSUs function through a clear sequence of grant, vesting, and settlement:
Grant: The employer promises a specific number of shares.
Vesting: These shares are released to the employee over a period (e.g., 25% per year for 4 years).
Settlement: Once vested, the shares are transferred to the employee, who may choose to hold or sell them.
Taxation: Taxes are applied when the RSUs vest and become actual shares.
Unlike stock options, RSUs always carry value once vested, as there is no exercise price involved.
Here’s a breakdown of how Restricted Stock Units (RSUs) compare with Stock Options:
| Feature | Restricted Stock Units (RSUs) | Stock Options |
|---|---|---|
| Ownership Timing |
After vesting |
After exercise |
| Exercise Price |
Not applicable |
Required to purchase at a set price |
| Value Guarantee |
Always has value once vested |
May be worthless if stock price is below exercise price |
| Taxation |
On vesting |
On exercise and possibly on sale |
| Risk to Employee |
Lower |
Higher due to stock price dependency |
Benchmarks vary across industries, and no single ratio should be interpreted in isolation. Always assess retention alongside return on equity and capital employed.
RSUs offer several benefits to both employees and employers:
Provide a guaranteed equity benefit after vesting
Align employee interests with company performance
Require no upfront cost or exercise payment
Help with talent retention through long-term vesting plans
Simplify communication and planning compared to complex option structures
Despite their advantages, RSUs come with certain limitations:
No control over timing of tax events (taxed upon vesting)
Lack of voting rights until shares are vested
No dividends unless company explicitly provides equivalent compensation
Vesting can be forfeited if employment ends prematurely
Taxation on RSUs occurs primarily at the time of vesting:
On Vesting: The value of the shares is treated as part of your salary income and taxed accordingly.
On Sale: Any gains or losses from the sale of RSU shares after vesting are subject to capital gains tax.
Tax Withholding: Employers typically withhold taxes when shares vest.
Double Taxation Check: Ensure you do not pay tax twice—once at vesting and again at sale—by tracking cost basis and filing properly.
Tax treatment may vary depending on whether you are a resident or non-resident Indian, and your income tax slab.
In the Indian context, RSUs are governed under the Income Tax Act and SEBI regulations for listed entities. Some key points include:
Taxed as perquisite income at vesting under "Income from Salary"
Capital gains apply upon sale, based on the holding period
RSUs must be reported in your Income Tax Return (ITR)
For foreign company RSUs, disclosures under Schedule FA are mandatory
Let’s assume an employee is granted 400 RSUs, vesting over 4 years at 100 units per year.
Grant Date: 1 January 2022
Vesting: 100 shares per year (25% per annum)
FMV on 1 Jan 2023: ₹500
Taxable Income in FY23: ₹500 × 100 = ₹50,000 (added to salary)
If the employee sells the shares later at ₹600, the capital gain will be ₹100 per share, subject to short-term or long-term capital gains tax depending on the holding period.
Restricted Stock Units can serve as an effective component of employee compensation and long-term wealth accumulation. They provide a sense of ownership while also rewarding loyalty and performance. However, understanding the taxation rules and vesting terms is important for effective financial planning.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Restricted Stock Units (RSUs) are company shares granted to employees that vest over time. Once vested, they are converted into actual stock that the employee owns.
You pay tax at the time the RSUs vest, as their value is added to your salary income. Additional capital gains tax applies when you sell the vested shares.
Unvested RSUs are typically forfeited if you leave your job. Vested RSUs remain yours, although you may need to sell or transfer them depending on company policy.
A restricted stock could be 1,000 shares granted to an employee with a 4-year vesting schedule. The employee receives 250 shares each year, which convert to actual stock once vested.
RSUs can lead to high tax at vesting, offer no voting rights until shares are transferred, and provide limited flexibility in timing of income recognition.