ITR Filing Alert for Salaried Employees! Know How RSUs & ESOPs Are Taxed:

ITR Filing Alert for Salaried Employees! Know How RSUs & ESOPs Are Taxed

As a salaried employee who is granted RSUs or ESOPs by their employer, it is necessary to understand and identify the differences that prevail amongst the said employment perks. This article has a simplified explanation about what RSU and ESOP mean and the comparison of the two.

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What is RSU?

RSU stands for Restricted Stock Units and is a restricted form of equity incentive granted to an employee by their employer. As the employee gets this benefit in the form of an incentive, they are not obligated to pay money for it. Although the employee is restricted in the vesting period from selling the stock unless they conclude a particular period of time with the employer. These days it is very commonly given by foreign companies (like Google, Microsoft, Amazon) to Indian employees or consultants.

What is ESOP?

ESOP stands for Employee Stock Option Plan, and it is a retirement plan for the employees which aims at granting the employees company stocks. It gives an ownership interest to the employees in the company they work for.

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Differences Between RSUs and ESOPs

The table below mentions the major differences between RSUs and ESOPs:

Basis	Employee Stock Option Plan	Restricted Stock Units
Choice to receive the incentive	Employees can choose whether or not to buy the shares.	Employees receive these shares at the end of the vesting period.
Market price	Market price plays a big role in an employee's decision.	Market price only matters for taxation.
Potential Upside	Higher growth potential	Limited to current stock value
Payment by employees	Employees need to pay to acquire the underlying shares.	Employees get them free of cost from the company.
Type of companies	These are popular with start-ups and high-growth companies in their early stage.	These are popular with old companies which are well-established.

Taxation (RSU vs. ESOP)

RSU Taxation The taxation of RSUs in India is identical to the taxation of any other equity share. These are taxed during the time of vesting and not upon being granted. They are considered as perquisite income under salary and taxed under the income slab rate. If the shares are provided by an overseas company, the currency exchange rate is also taken into account. Report as Foreign Asset: Shares of an overseas company should be disclosed in the ITR under Foreign Assets. Non-Reporting can lead to penalty of Rs. 10 lakh under the Black Money Act. At the time of sale by the employee: The Difference between Sale Price less FMV on vesting date is taxed as Capital Gain. The holding period starts from the vesting date. The Capital gain will be short-term if shares held forupto 12*/24 Months. The Tax is calculated at Slab Rate. The capital gain will be short-term if shares are held for more than 12*/24 months. The tax is calculated at 12.5% without indexation. Form 67 to claim foreign tax credit Sometimes withholding tax in deducted by a foreign company. This practice is very common with the US-based companies that are NASDAQ-listed. In this case, one must file Form 67 to claim foreign tax credit (FTC), as we are also paying tax on the same income in India. ESOP Taxation ESOP in India is taxed under two circumstances: At the time of exercise: When the employee exercises the option or we can say agrees to buy, the difference that comes between Fair Market Value and the exercise price is taxed as a perquisite. At the time of sale by the employee: When an employee sells these shares, one more tax event comes into the picture; the difference between the sale price and FMV on the exercise date is taxed as capital gains. The holding period starts from the vesting date. The Capital gain will be short-term if shares held for upto 12*/24 Months. The Tax is calculated at Slab Rate. The capital gain will be short-term if shares are held for more than 12*/24 months. The tax is calculated at 12.5% without indexation. *12 months in case of Listed Shares in India.

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Pros and Cons: RSU Vs ESOP

RSU Pros:

• More straightforward mechanism as compared to stock options.
• Immediate equity stake in the company.
• Guaranteed value upon vesting.
• No upfront purchase is required.

RSU Cons:

• Low potential for extraordinary gains.
• Instant tax liability.
• Less flexibility when compared to stock options.
• Dependence on continued employment.

ESOP Pros:

• Potential for significant upside if company stock appreciates
• Flexibility in exercise timing
• Lower upfront cost compared to direct stock purchase
• Potential tax deferral opportunities.

ESOP Cons:

• Complexity in understanding exercise mechanics.
• Risk of options becoming less worthy.
• Potential loss of value if employment gets terminated.
• Limited guaranteed value.

ITR Filing Checklist

• Form 16 for salary income (with RSU perquisite)
• Report capital gains on sale
• File Form 67 for foreign tax credit
• Use the correct ITR (ITR-2 or 3)
• Report in Schedule Foreign Asset
• Maintain proper documentation
• Employer equity portal (Fidelity, E*TRADE, etc.
• SBI TT Rate: https://statebankofindia.com

Do write to us on [email protected] in case you need help with your ITR Filing.