How are RSUs and ESOPs taxed in India? A two-stage guide with a worked example
Short answer. RSUs, ESOPs and ESPPs are taxed twice, on two different amounts. When shares vest or you exercise, the market value minus what you paid is salary, taxed at your slab through TDS. When you sell, only the rise after that date is a capital gain. Foreign shares add three jobs: rupee conversion, Form 67 and Schedule FA.
How are RSUs taxed when they vest?
The law treats employer shares as a perquisite, which is part of salary (Section 17 of the Income-tax Act, 2025; formerly s.17(2)(vi)). The taxable amount depends on the plan:
- RSU: fair market value (FMV) on the vesting date × shares vested. You pay nothing, so the whole value is taxed.
- ESOP: FMV on the exercise date minus the exercise price. Nothing is taxed at grant or at vesting.
- ESPP: FMV on the purchase date minus the discounted price you paid.
Your employer adds this to salary, deducts TDS (often by selling some of the shares, called sell-to-cover) and reports it in your salary TDS certificate: Form 16, renumbered Form 130 from tax year 2026-27. There is no special RSU tax rate at this stage. It is your slab rate.
What is the RSU tax rate in India when I sell?
Your cost for capital gains is the FMV already taxed as perquisite, not zero, and the holding period runs from the allotment date. Rates depend on where the share is listed:
| Share | Long-term if held over | Long-term rate | Short-term rate |
|---|---|---|---|
| Listed in India, sold on the exchange with STT | 12 months | 12.5% on gains above ₹1.25 lakh a year | 20% |
| Listed abroad (for example a US parent) | 24 months | 12.5%, with no ₹1.25 lakh exemption and no indexation | Slab rate |
| Unlisted Indian company | 24 months | 12.5%, no indexation | Slab rate |
Add 4% cess, and surcharge where it applies. Sections 196, 197 and 198 of the 2025 Act (formerly s.111A, 112 and 112A). Budget 2026 left these rates unchanged.
RSU tax example
Assume 100 RSUs of a US-listed parent vest at $50 when SBI's rate is ₹85, and you sell all 100 thirty months later at $70 when the rate is ₹88. You are in the 30% slab; surcharge is ignored.
| Step | Working | Amount |
|---|---|---|
| Perquisite at vesting | 100 × $50 × ₹85 | ₹4,25,000 |
| Tax on perquisite (30% + 4% cess) | ₹4,25,000 × 31.2% | ₹1,32,600 |
| Sale value | 100 × $70 × ₹88 | ₹6,16,000 |
| Long-term capital gain | ₹6,16,000 − ₹4,25,000 | ₹1,91,000 |
| Tax on gain (12.5% + 4% cess) | ₹1,91,000 × 13% | ₹24,830 |
Had you sold within 24 months, the same ₹1,91,000 would be a short-term gain taxed at slab: ₹59,592. And if the cost had wrongly been taken as zero, ₹4,25,000 would have been taxed twice. If your employer sold some shares to cover TDS, that sale is a transfer too and must be reported, usually with a small gain or loss.
How do I convert dollars to rupees?
Use State Bank of India's telegraphic-transfer buying rate, not a search-engine or broker rate. For capital gains, the rules (formerly Rule 115) take the rate on the last day of the month before the month of sale. Dividends follow the same pattern. Keep a note of each rate you used; the figures in Form 67 and the foreign-income schedules of the return must agree.
Foreign tax credit, Form 67 and Schedule FA
- Dividends on foreign shares are taxed in India at your slab rate. The US typically withholds 25% from Indian residents. You claim credit for that tax by filing Form 67 online (renumbered Form 44 from tax year 2026-27). For AY 2026-27 it can be filed until 31 March 2027 provided the return was filed within the permitted time, but file it before the return to be safe.
- Schedule FA. A resident and ordinarily resident person must list foreign shares and the brokerage account holding them, even in a year with no sale. Reporting follows the calendar year. It needs ITR-2 or ITR-3, never ITR-1; see which ITR form to file.
- Penalty. Non-disclosure can attract ₹10 lakh under the Black Money Act, with relief where foreign assets other than immovable property total ₹20 lakh or less. A one-time disclosure scheme for small past omissions (FAST-DS 2026) is open until 31 December 2026.
What is "tax deferred on ESOP" for start-ups?
Employees of an eligible start-up can pay the perquisite tax later. Eligible means the company holds the Inter-Ministerial Board certificate under Section 140 (formerly s.80-IAC); DPIIT recognition alone is not enough. The tax, computed at the rates of the year of allotment, falls due within 14 days of the earliest of:
- 60 months from the end of the tax year of allotment (the old Act said 48 months from the end of the assessment year, which is the same date);
- the date you sell the shares; or
- the date you leave the company.
The deferral moves the payment date only. If it applies to you, ITR-1 is not available.
FAQ
Is ESOP taxable in India?
How are RSUs of a US company taxed in India?
Do I have to report RSUs if I have not sold any?
How can I reduce tax on ESOPs and RSUs?
Sources: Income-tax Act, 2025, sections 17, 196–198, 289 and 392 (text of s.289); Income Tax Department: Rule 115; ClearTax: Form 67; ClearTax: Schedule FA; KPMG: FAST-DS Rules, 2026; Angel One: Budget 2026 rates. All checked 19 Sep 2026. Education only, not tax advice for your situation.
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