If you have received RSUs (Restricted Stock Units) or ESOPs (Employee Stock Options) from your employer, the single most important thing to understand is this: your shares are taxed twice, at two different points in time, under two completely different heads of income. First as salary when the shares come into your hands, and again as capital gains when you finally sell them. Miss the distinction and you will either overpay, or — more commonly — get a tax notice for underpaying.
This guide walks through both stages with a worked example, then covers the extra layer that trips up most techies: foreign RSUs from a US or overseas parent, the foreign tax credit, and the Schedule FA disclosure that carries penalties running into lakhs if you skip it.
The two-stage rule in one line
Stage 1 — when RSUs vest (or you exercise an ESOP), the value of the shares is taxed as a salary perquisite under Section 17(2)(vi). Stage 2 — when you sell those shares, the gain over the value already taxed is taxed as capital gains. The value taxed as perquisite becomes your cost of acquisition for the capital gains computation, so the same rupee is never taxed twice (Section 49(2AA)).
Stage 1: Perquisite at vesting / exercise
The taxable perquisite is the Fair Market Value (FMV) of the shares on the vesting/exercise date, less whatever you paid for them. For RSUs the exercise price is usually nil, so the entire FMV is taxable. For ESOPs it is FMV minus your exercise price.
How FMV is determined depends on the share:
- Listed on an Indian stock exchange: the average of the opening and closing price on the exercise date (per Rule 3(8) of the Income-tax Rules).
- Unlisted Indian shares or foreign shares (e.g. shares of a US-listed parent): a valuation by a Category-I merchant banker as on the exercise date, or the exchange price converted at the SBI TT buying rate for foreign-listed stock.
This perquisite is added to your salary, shown in Form 16, and your employer deducts TDS under Section 192 on it. If the shares are foreign, the employer often sells a portion (“sell-to-cover”) to fund the TDS.
The startup deferral (a narrow relief)
Employees of an eligible DPIIT-recognised startup can defer the perquisite tax to the earliest of: five years from allotment, the date they sell the shares, or the date they leave the company. This is a deferral of the tax payment, not an exemption — and it applies only to eligible startups, not to MNC RSUs.
Stage 2: Capital gains at sale
When you sell, your gain is sale price minus the FMV already taxed as perquisite. The holding period is counted from the date of exercise/allotment (not from the grant date), and this is where listed and unlisted/foreign shares part ways for FY 2025-26 (AY 2026-27):
| Type of share | Long-term if held for | Short-term rate | Long-term rate | Rs 1.25 lakh exemption? |
|---|---|---|---|---|
| Listed Indian equity (STT paid) | More than 12 months | 20% (Section 111A) | 12.5% (Section 112A) | Yes |
| Unlisted / foreign shares (e.g. US RSUs) | More than 24 months | Your slab rate | 12.5%, no indexation | No |
Two points people consistently get wrong: the Rs 1.25 lakh annual LTCG exemption applies only to listed equity taxed under Section 112A — it does not apply to foreign or unlisted shares. And short-term gains on foreign shares are taxed at your slab rate, not the 20% that applies to listed Indian equity. You can model either scenario with our RSU & ESOP Tax Calculator, and cross-check the capital gains figure using the Capital Gains Tax Calculator.
A worked example (Indian listed RSU)
Suppose 100 RSUs of your Indian-listed employer vest on 10 August 2025 when the share price (FMV) is Rs 2,000. You sell all 100 on 20 December 2026 at Rs 2,600.
| Step | Computation | Amount / Tax |
|---|---|---|
| Perquisite on vesting (FY 2025-26) | 100 × Rs 2,000 | Rs 2,00,000 taxed as salary; TDS u/s 192 |
| Cost of acquisition for capital gains | FMV already taxed = 100 × Rs 2,000 | Rs 2,00,000 |
| Sale value | 100 × Rs 2,600 | Rs 2,60,000 |
| Capital gain (held > 12 months → LTCG) | Rs 2,60,000 − Rs 2,00,000 | Rs 60,000 |
| LTCG tax | Rs 60,000 is within the Rs 1.25 lakh exemption | Rs 0 |
Had you sold within 12 months, the Rs 60,000 would be short-term and taxed at 20% (Rs 12,000 plus cess). The holding-period clock is worth watching.
Foreign RSUs: the part that gets people penalised
If your RSUs are of a foreign parent (very common in Indian IT and product companies), three extra obligations apply once you are a Resident and Ordinarily Resident:
1. Foreign Tax Credit (FTC)
The US (or other country) usually withholds tax at vesting. To avoid the same income being taxed twice, you claim a Foreign Tax Credit under Section 90 (treaty) or Section 91 (unilateral) — but only if you file Form 67 before filing your return. The credit is capped at the lower of the foreign tax paid or the Indian tax on that income.
2. Schedule FA disclosure
You must report the foreign shares and the overseas brokerage account (Schwab, Fidelity, etc.) in Schedule FA of your ITR. Note the trap: Schedule FA works on a calendar-year basis, so for the AY 2026-27 return you disclose holdings as at 31 December 2025, not 31 March. Unvested RSUs need not be reported; vested (owned) shares must be.
3. The Black Money Act penalty
Non-disclosure of a foreign asset is not a small matter. Under the Black Money Act, undisclosed foreign assets can attract tax at 30% plus a penalty of three times the tax, with prosecution possible. Even a genuinely owned, fully-taxed RSU can trigger this simply because it was left off Schedule FA — so disclose even if there is no gain.
Key takeaways
- RSUs/ESOPs are taxed twice: as a salary perquisite at vesting/exercise, and as capital gains at sale.
- The FMV taxed as perquisite becomes your cost of acquisition, so there is no double tax on the same value (Section 49(2AA)).
- Holding period runs from the exercise/vesting date — 12 months for listed Indian equity, 24 months for unlisted/foreign shares.
- The Rs 1.25 lakh LTCG exemption and the 20% STCG rate apply only to listed Indian equity; foreign shares get 12.5% LTCG (no exemption) and slab-rate STCG.
- For foreign RSUs, file Form 67 for the Foreign Tax Credit and always report holdings in Schedule FA — non-disclosure invites Black Money Act penalties.
Frequently Asked Questions
Is tax payable at vesting even if I do not sell the shares?
Yes. The perquisite is taxed as salary on the vesting/exercise date regardless of whether you sell. Your employer will deduct TDS, and many sell a few shares to fund it. Selling later is a separate, second taxable event.
What is my cost of acquisition when I sell?
It is the FMV that was already taxed as a perquisite at vesting/exercise — not zero and not the grant-date price. Using the perquisite value avoids being taxed twice on the same amount.
Do foreign RSUs qualify for the Rs 1.25 lakh LTCG exemption?
No. That exemption and the concessional 112A treatment apply only to listed Indian equity on which STT is paid. Foreign shares are taxed at 12.5% (long-term, no indexation) or at your slab rate (short-term).
I forgot to file Form 67 — can I still claim the foreign tax credit?
Form 67 should be filed before your return. Tribunals (e.g. Brinda Rama Krishna) have held that a delay in filing Form 67 should not defeat the substantive FTC claim, but relying on litigation is risky — file it on time.
What if I did not report my foreign RSUs in Schedule FA in earlier years?
Consider filing an updated return and disclosing them, and consult a CA promptly. The Black Money Act penalties for non-disclosure of foreign assets are severe (up to three times the tax plus possible prosecution), so proactive correction is far safer than waiting for a notice.