RSU vesting: the real tax math for Indian residents

Your offer letter says you're getting $50,000 in RSUs vesting over four years. That sounds clean. It isn't.

Between the day those RSUs vest and the day rupees actually hit your bank account, three different tax events happen. Most people only know about one.

This post walks through all three for an Indian resident at a US multinational.

Event 1: vesting (perquisite tax)

The day your RSUs vest, the fair market value of those shares is treated as salary income in India. Your employer adds it to your payslip as a "perquisite" and you owe tax on the entire vested value at your marginal slab.

Walk through a single tranche:

• 25 shares vest at $200/share = $5,000.
• USD/INR is ₹83.5 → vest value = ₹4,17,500.
• You're in the 30% slab with 15% surcharge and 4% cess → effective rate ≈ 35.88%.
• Perquisite tax owed: ₹1,49,790.

Use the RSU Calculator to plug in your own numbers.

How does your employer collect this? They sell some of the shares to cover it — the sell-to-cover mechanism. Typically they sell roughly 30–35% of the shares at market price on vest day, send INR equivalent to the tax authority, and deposit the remaining shares in your brokerage account.

Event 2: US dividend withholding (if you hold)

If you keep the shares and they pay dividends, the US withholds 25% under the US-India treaty (assuming you've filed a W-8BEN with your broker — your employer's plan administrator, usually Fidelity or E*TRADE, handles this).

The 25% withholding is a foreign tax credit you can claim in India by filing Form 67 before your ITR. If you don't file Form 67 in time, you lose the credit and you've effectively been double-taxed on those dividends.

Event 3: capital gains when you sell

Eventually you sell the shares. The gain (or loss) is computed in INR:

• Cost basis = the FMV on vest day × USD/INR rate on vest day. (You already paid perquisite tax on this — it does not get taxed again.)
• Sale proceeds = sale price × USD/INR rate on sale day.
• Capital gain = proceeds − cost basis.

Tax treatment depends on the holding period from the vest date (not the grant date):

• ≤ 24 months: short-term capital gain, taxed at your slab.
• > 24 months: long-term capital gain at 12.5% (no indexation, post Budget 2024) plus surcharge and cess.

Two things often surprise people:

1. The 24-month threshold (vs. 12 months for Indian listed shares).
2. The currency leg: if the stock is flat in USD but the rupee depreciates, you have an INR gain that's taxable. Currency moves are baked into the math.

A worked end-to-end example

Same 25-share tranche from above. Suppose you hold for 30 months and sell at $260/share, with USD/INR at ₹86 on sale day.

Event	Amount (INR)	Notes
Vest value (gross)	₹4,17,500	25 × $200 × ₹83.5
Perquisite tax @ 35.88%	−₹1,49,790	Sell-to-cover
Net shares retained	~16 shares	After ~9 sold for tax
Sale proceeds (16 × $260 × ₹86)	₹3,57,760
Cost basis (16 × $200 × ₹83.5)	₹2,67,200	What you already paid tax on
LTCG	₹90,560
LTCG tax @ 12.5% + cess	~₹11,773
Net rupees from this tranche	~₹3,45,987

The headline "$5,000 vesting" turned into roughly ₹3.46 lakh in your hand — about 83% of the gross vest value, after a ~30% gain in the underlying stock. Most of the leakage is the perquisite tax at vest, not the capital gains tax.

What this means in practice

A few takeaways that fall out of this math:

• Don't treat unvested RSUs as cash. They're a leveraged, single-stock, dollar-denominated bet that you'll be partially forced to liquidate at vest.
• The perquisite tax dominates. If you're going to optimize anything, optimize when you sell (capital gains decisions) — not whether to "avoid" the perquisite tax. You can't avoid it.
• File Form 67 if you hold for dividends. Otherwise the 25% US withholding is just gone.
• Track your cost basis in INR per tranche. When you sell, the broker reports USD numbers; the Indian tax filing needs INR. Keep a spreadsheet.

In the next RSU post we'll cover the most under-discussed question: once those shares are sitting in your brokerage account, should you keep them or sell?