RSUs or Restricted Stock Units are a type of compensation benefits that employers offer to employees. These benefits are often awarded based on performance, and issued through a vesting plan and distribution schedule. Until the vesting period is complete, RSUs have no tangible value. When vested, these units can be sold off at Fair Market Value or FMV. However, a portion of these shares is withheld by the company to pay income tax and the rest go to the employee.
Infosys granted RSUs to its top-performing middle-level managers in June 2016. A four-year vesting period was set and shares were offered at par value. Let’s suppose that an Infosys mid-level manager received 1,000 units. If the employee continues to work with the company and meets performance parameters, she will receive 250 shares in the years 2017, 2018, 2019, and 2020. Now, if the share trade of Infosys is INR 1,200 next year, INR 1,500 the year after that, and INR 2,000 thereafter, the employee will cash the shares in the market at these prices. The employee will make a profit of around INR 1.5 lakh to INR 2.5 lakh in each of the next four years. At the same time, Infosys retained this top-performing employee, issued RSUs at no administration cost, and ensured that the shares were not diluted until 2020.
Taxation on RSUs
One can sell only those RSUs that are vested (after the acquisition date). The profit earned is considered as a capital gain and is therefore taxable in India. For RSUs,
Capital Gain = FMV – Price on vesting date
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Short-term capital gain
- The sale takes place within 24 months of holding
- Taxed at employee’s income tax slab rates
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Long-term capital gain
- The sale takes place after 24 months of holding
- Taxed at 20% with indexation, and 10% without the benefit of indexation
Advance tax – When the capital gain exceeds INR 10,000, an advance tax needs to be paid. Consult your CA for more details.
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