RSU vesting during the year of return: the attribution rule, worked example, and documentation requirements

A returning NRI moved from Seattle to Bangalore on July 1, 2024. They had a Microsoft Annual Stock Award granted on September 15, 2022 — a 5-year vesting grant with quarterly vests. One of the vest events was scheduled for September 25, 2024 — i.e., 87 days after they returned to India.

Their Microsoft India payroll team treated the September 25, 2024 vest as fully Indian perquisite — using SBI TTBR on the vest date and reporting the full INR-converted gross vest value on Form 16 as Section 17(2) perquisite. India tax was deducted accordingly.

Their cross-border CA pulled out the calendar. The vest event corresponded to the second-year quarterly vest of a 5-year grant — meaning the service period for that vest was the year from September 15, 2023 to September 15, 2024 (or per quarter-level interpretation, the 90 days from June 25, 2024 to September 25, 2024). The engineer was in the US until July 1, 2024 — about 77% of the relevant year-long service period was in the US, and only ~23% was in India.

Under the DTAA Article 16 attribution rule, only the India-service-period portion of the vest should be Indian perquisite. The other 77% is attributable to US service and primary taxing right lies with the US (subject to FTC reconciliation under Form 44).

But Microsoft India had already paid TDS on 100% of the vest value. To file correctly, the engineer's CA would have to claim only the 23% as Indian perquisite on Schedule S — and either get Microsoft India to issue a revised Form 16 reflecting the actual attribution, or accept that Form 16 over-reported and file a position that the perquisite shown was for the gross, but only a portion is taxable to India.

This is the most technically complex filing scenario in the entire RSU lifecycle. The structural mechanics work; the documentation defense matters. Done correctly, the returnee saves substantial tax (potentially Rs 10-30 lakh per affected vest). Done incorrectly, they over-pay by the same amount or face audit risk.

This article is the attribution rule deep-dive. The structural framework lives in RSU vesting while in US vs India; this article fills in the year-of-return specifics — the DTAA Article 16 mechanic, the day-count methodology, multiple worked scenarios across different vest cadences, the Form 12BA / Form 16 reconciliation when your employer reported 100% as Indian, and the documentation you'll need to defend the attribution position on audit.

The DTAA Article 16 attribution rule

The India-US Double Taxation Avoidance Agreement Article 16 (Salaries) governs the taxation of employment income for residents of either country. The relevant principle:

"Salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State."

The English version of this principle: employment income is taxed where the employment is exercised (i.e., where the work happens). For an RSU that vests over multiple years of service, the "exercise" of the employment happens across multiple jurisdictions if the employee moves during the vesting period.

The Indian tax department's settled position (consistent across CBDT clarifications, ITAT rulings, and AAR rulings since the late 2010s):

RSU perquisite tax in India is attributable to the days of Indian service during the vesting period.

Formula:

India-attributable perquisite = (Days of India service in vesting period / Total days in vesting period) × Gross vest value

The complementary US-attributable portion is the remainder, taxable in the US (subject to DTAA Article 16(2) exceptions for short-term presence).

What counts as the "vesting period"

The "vesting period" is the time over which the employee earns the right to the eventual vested shares. This isn't the same as the grant-to-vest period; it's specifically the service period associated with that particular vest event.

For most RSU schedules:

Vest schedule	Vesting period for each vest event
4-year vest, 25%/year, annual cliff	12 months of service preceding each anniversary vest
4-year vest, 25%/year, quarterly disbursement after 1-year cliff	First vest: 12 months. Subsequent vests: 3 months each
4-year vest, 33-22-25-20 (Google), quarterly	First vest: 3 months. All subsequent: 3 months each
5-year vest, 20%/year, quarterly after 1-year cliff (Microsoft)	First vest: 12 months. All subsequent: 3 months each
Amazon 5-15-40-40 with annual Y1 and Y2 vests	Y1 vest: 12 months. Y2 vest: 12 months. Y3-Y4 vests: 3 months each
Apple semi-annual vests	6 months each
Meta monthly disbursement	1 month each (theoretical) or quarterly aggregation (practical)

For purposes of the attribution calculation, use the relevant vesting period for each specific vest event — not the full grant-to-final-vest period.

Example: Microsoft Annual Stock Award granted September 15, 2023 with quarterly vest after Year 1 cliff. The September 25, 2024 vest event has a 12-month vesting period (the Y1 cliff vest), spanning September 15, 2023 to September 15, 2024. If you returned to India on July 1, 2024, the days-in-India portion is roughly 76 days (July 1 – September 14) / 365 days = 21%.

Alternative interpretation: Some cross-border CAs use the quarter-level vesting period for the second-year-onwards vests (since the first vest covered Y1 cliff and subsequent vests are 3-month tranches). Under this interpretation, the September 25, 2024 vest's 90-day vesting period might span from June 25, 2024 to September 25, 2024, of which 87 days were in India = ~97% India attribution. Different from the annual-period interpretation.

The "right" interpretation isn't fully settled. Conservative position: use the longer attribution period (the annual cliff covering the first year, applied retroactively to later quarterly vests of that grant). Aggressive position: use the quarterly attribution period from year 2 onwards.

Document your interpretation and defend it consistently.

Worked example: a Microsoft engineer returning July 2024

The engineer in the opening scenario joined Microsoft India in March 2022. Continued working in Microsoft Bellevue from January 2023 to June 30, 2024 (US transfer). Returned to Bangalore July 1, 2024.

Vest events for FY 2024-25 (the year of return):

Vest event	Grant	Vest date	Total days in vesting period	Days in India	India attribution %
Q2 2024 vest	On-Hire grant (Mar 2022)	April 25, 2024	90 days (Jan 25 – Apr 25 = ~90)	0 days (still in US)	0%
Q3 2024 vest	On-Hire grant	July 25, 2024	90 days (Apr 25 – Jul 25)	25 days (July 1 – July 25)	~28%
Y1 cliff vest of Sep 2023 ASA	2023 Annual Stock Award	Sep 15, 2024	365 days (Sep 15, 2023 – Sep 15, 2024)	76 days (Jul 1 – Sep 14)	~21%
Q4 2024 vest	On-Hire grant	Oct 25, 2024	90 days (Jul 25 – Oct 25)	90 days (all in India)	100%
Q1 2025 vest	On-Hire grant	Jan 25, 2025	90 days (Oct 25 – Jan 25)	90 days (all in India)	100%

Total Year-of-Return Indian perquisite (illustrative):

Assume each quarterly vest of On-Hire grant = $10,000 USD; and Y1 cliff vest of 2023 ASA = $50,000 USD. Total gross vest value across all events = $90,000 USD ≈ Rs 75 lakh.

Applying attribution:

Vest event	Gross USD	INR (at vest-date TTBR)	India attribution %	India-taxable perquisite
Q2 2024	$10,000	Rs 8.30 lakh	0%	Rs 0
Q3 2024	$10,000	Rs 8.40 lakh	28%	Rs 2.35 lakh
Sep 2024 cliff	$50,000	Rs 42 lakh	21%	Rs 8.82 lakh
Q4 2024	$10,000	Rs 8.50 lakh	100%	Rs 8.50 lakh
Q1 2025	$10,000	Rs 8.50 lakh	100%	Rs 8.50 lakh
Totals	$90,000	Rs 75.70 lakh	38% blended	Rs 28.17 lakh

The attribution rule reduces the Indian perquisite from Rs 75.70 lakh (if filed at 100%) to Rs 28.17 lakh (correctly attributed). Tax savings at top slab: roughly Rs 14-15 lakh.

The complementary US-attributable portion (Rs 47.53 lakh ≈ $57,000) was already taxed in the US through Morgan Stanley's sell-to-cover mechanism. FTC for that US tax is claimable in India via Form 44 — though under the attribution rule, the income itself isn't Indian-taxable, so FTC isn't strictly needed (you're not double-claiming).

RNOR overlay on attribution

If the returnee is RNOR for FY 2024-25 (which most US-to-India returnees are), an additional layer applies on top of the attribution rule.

Under RNOR: foreign-source income earned and received outside India is generally not taxable in India.

The interpretation for RSU vests during RNOR:

• The US-attributable portion of the vest is foreign-source (earned during US service period) and was received in the US (in the brokerage account). Generally not taxable in India under RNOR rules — even before applying the attribution rule.
• The India-attributable portion is Indian-source (earned during India service period). This is taxable in India regardless of RNOR status.

So for an RNOR returnee, the effective Indian tax liability is approximately the same whether you use the attribution rule alone OR the RNOR rule alone — only the India-attributable portion is taxable.

Where they differ:

• Attribution alone applied to an ROR returnee: same result (only India portion taxable)
• RNOR alone, no attribution: US-portion exempt because "foreign source not received in India"
• Both apply simultaneously to RNOR returnee: same outcome — only India portion taxable

The practical implication: for an RNOR returnee, the attribution + RNOR combination gives the cleanest defensible position. Filing as attribution-applied also produces a sustainable position into the post-RNOR years.

The Form 16 / Form 12BA reconciliation problem

The biggest practical complication: your Indian employer's payroll typically reports 100% of the gross vest value as Indian perquisite on Form 16. They don't know about your US service period; they don't apply attribution; they just report what they processed.

Three approaches to handle the Form 16 over-reporting:

Approach 1: Request a revised Form 16

Ask Microsoft India HR/payroll to issue a revised Form 16 reflecting only the India-attributable portion. Provide:

• Your day-by-day residency record (passport stamps, employment dates)
• Calculation of attribution percentages
• Cross-border CA letter supporting the calculation

Pros: Clean alignment between Form 16 and ITR-2. Cons: Many employers refuse or delay. Some may require formal CA opinion. Often takes weeks.

Approach 2: File the correct attribution on ITR-2, attach reconciliation

File only the India-attributable portion in Schedule S, even though Form 16 shows the higher number. Attach a working that explains the discrepancy.

Pros: Doesn't depend on employer cooperation. Cons: AIS will show the higher Form 16 figure; mismatch flagged for review.

Approach 3: File full Form 16 perquisite, claim "FTC" via Schedule FSI for US portion

File the full Form 16 perquisite in Schedule S; show the US-attributable portion separately in Schedule FSI; claim FTC for any US tax actually paid (via sell-to-cover) on the US portion through Schedule TR.

Pros: Aligns with Form 16; reduces scrutiny. Cons: Strictly speaking, this isn't quite right — you'd be acknowledging US tax-jurisdiction and over-claiming Indian income that you should have attributed out. But pragmatically, often produces the same final tax outcome.

Recommended approach: Work with your cross-border CA to evaluate the specific position. For most returnees, Approach 1 if possible, fallback to Approach 2 with strong documentation. Approach 3 is the lazy default that some CAs adopt but isn't ideal.

Documentation to defend the attribution position on audit

If the Income Tax Department audits your Year-of-Return ITR-2, they'll want:

1. Passport copy with all stamps (entry/exit dates for US, India, and any other countries)
2. US employer end-date letter (Microsoft Bellevue confirms the July 1 transition)
3. Indian employer start-date letter (Microsoft India confirms post-return employment continued or started)
4. Original RSU grant memo showing grant date, vesting schedule, and grant size
5. Annual Stock Award memos for each ASA
6. Form W-2 from US for years preceding the move
7. Brokerage statements (Morgan Stanley) showing the gross vest values and dates
8. Form 1042-S showing any US tax withheld on the US-attributable portion
9. Cross-border CA opinion letter supporting your attribution interpretation
10. Spreadsheet detail of the attribution calculation for each vest event

Keep all of this for at least 8 years from the assessment year. Section 132 (search) cases can re-open up to 6 years; Black Money Act has no time bar.

Common attribution scenarios

Scenario A: Vest while still in US, before move. Pre-July 1, 2024 vests are 100% US-attributable. India has no claim (and you're not yet a Resident for FY 2024-25 if you haven't met the 182-day threshold by the time of vest).

Scenario B: Vest immediately after return. A vest 3 weeks after return (e.g., July 25, 2024 vest for the quarter from April 25 to July 25) has an attribution period that's ~75% pre-return / 25% post-return. India-taxable = ~25%.

Scenario C: Cliff vest covering both periods. A 1-year cliff vest for a grant from September 2023 vesting in September 2024 has ~21% India attribution if the move was July 1, 2024.

Scenario D: Vest months after return. Vests in Q4 2024 onwards (October 25, 2024 vest for the July 25-October 25 period) are 100% India-attributable. India taxes the full amount.

Scenario E: Subsequent-year refresh grant granted post-return. A refresh granted October 2024 (post-return) is entirely India-attributable for all its vests. India taxes 100% of each subsequent vest.

Scenario F: Promotion-grant after return. Same as Scenario E.

Six common errors with the attribution rule

1. Filing the full Form 16 perquisite without applying attribution. The most expensive error. Over-pays Indian tax by potentially Rs 10-30 lakh per affected vest year.

2. Using vest date to determine attribution instead of vesting period. Vest date is when the event happens; vesting period is the service window the vest relates to. Use the period for attribution math.

3. Ignoring the cliff vest's longer attribution period. The Year-1 cliff vest of a 4-year grant has a 12-month vesting period, not a 3-month vesting period. Apply attribution to the full 12 months.

4. Confusing "days in India during vesting period" with "days in India during the FY". Section 6(1) uses days in FY for residency status. Attribution uses days in vesting period for the partial allocation. Different time windows.

5. Failing to defend the position with documentation. The attribution rule is legally defensible but requires evidence. Don't assume Income Tax Department audit will accept the calculation without documentation.

6. Applying attribution to ESPP discount perquisite. ESPP discount is taxable at purchase date, period. Don't try to attribute the ESPP discount across service periods — it's a single-day event.

Post-attribution: the post-cliff filing pattern

Once you've successfully applied attribution to the year-of-return vests, subsequent years follow standard rules:

• FY 2025-26 and beyond: Vests are 100% India-attributable (full year of India service preceding each vest). Standard RSU lifecycle framework applies.
• Refresh grants granted post-return: All vests of these grants are 100% India-attributable. Standard framework.
• PRSU vests with year-of-return vesting: Apply the same attribution rule to the gross vest value (post-multiplier). The multiplier doesn't change the attribution methodology.

The attribution rule is structurally a one-time complication for the year-of-return ITR-2. After that, the filing returns to standard mode.

Wrap-up of the Returning NRI playbook

This article completes the 5-article Returning NRI playbook:

1. Moving back to India with US RSUs — the complete playbook — the master overview
2. Becoming RNOR — the residency math and timing — Section 6 deep dive
3. What happens to your 401(k) and IRA when you return to India — retirement accounts
4. Selling US property as a returning NRI — FIRPTA + India tax + repatriation
5. This article — RSU vesting during the year of return

Foundational cross-references that apply across all five:

• How RSU double-taxation actually works — the structural 3-event framework
• Reading your Morgan Stanley StockPlan Connect statement — field-by-field translation
• From vest to ITR-2: the 12-step workflow — execution
• RSU vesting while in US vs India — the broader bilateral framework
• Schedule FA disclosure guide — the calendar-year disclosure
• Form 67 vs Form 44 transition — FTC mechanics

Employer-specific guides (each contains employer-specific attribution complications):

• Google (Alphabet) RSU India guide — 33-22-25-20 vesting
• Microsoft RSU India guide — On-Hire + ASAs + ESPP
• Meta RSU India guide — Schwab, PSU multipliers
• Amazon RSU India guide — 5-15-40-40, Year 3 cliff
• Apple RSU India guide — semi-annual, ESPP 15% + lookback
• NVIDIA RSU India guide — Schwab, quarterly, post-split

For the structural diversification decision that often coincides with the year of return: Rovia lets you transfer your concentrated US employer shares from any major broker into a diversified portfolio without triggering a sale event. For returnees navigating the attribution complications of the year-of-return vests, the simultaneous diversification opportunity is often the biggest structural decision of the entire transition. In-kind transfer preserves the foreign-equity asset bucket structure and the original cost basis.

This article reflects the attribution rule as interpreted through ITAT and AAR rulings through 2026. The DTAA Article 16 mechanic is durable and unlikely to change without a new India-US treaty negotiation. The Indian tax authority's position on RSU attribution has been consistent since the late 2010s; specific implementation details (Form 16 reconciliation procedures, etc.) update administratively. We refresh this guide annually after each Budget; the framework holds.