Common Mistakes While Reporting RSU Income in India

1. Introduction

Understanding RSU Taxation in India

Many global tech, consultancy and financial services companies offer employees Restricted Stock Units (RSUs) as a part of their compensation. While getting company stocks is obviously great news, taxes around RSUs tend to baffle employees since it has various points of taxation that have to be taken into consideration and are prone to error leading to tax notices. 

What Are RSUs?

RSUs are a type of equity compensation given as reward to employees by making them promise to work for a particular amount of time, after which they are given a certain number of company shares. In many cases these shares are released to the employee in accordance with a vesting schedule rather than all at once 

There are three important dates regarding RSUs and taxes: 

– The grant date, when the employee is granted RSUs by the company, and they do not have to pay any taxes since there is no value received yet. 

– Vesting date, when the employee receives the shares and pays taxes on the fair market value (FMV) of the shares as salary. 

– The sale date, when the employee sells the shares, and pays taxes on the difference between the sale price and FMV. This could result in either tax savings or additional tax liability.  

Why Do Tax Errors Occur?

Taxation around RSUs is far more involved than regular salary since there are multiple points at which an employee might have to pay taxes. Additionally, there are various documents that need to be referred to while filling taxes, such as brokerage statements, employer tax statements, and foreign tax documents if the parent company is based abroad. 

The tax liability for RSUs can occur at multiple points depending on how they are issued. Many companies issue RSUs with a vesting schedule, which means that you get your shares in portions rather than at once. At each vesting date, the employee has a tax liability based on the FMV of shares vested on that date. Additionally, if the RSUs are issued by a foreign entity, there are additional steps required to report foreign assets in India, such as filing form 67, or even paying additional tax depending on circumstances. 

Overview of Taxation At Different Stages

When RSUs Are Granted 

The grant of RSUs by the company is not a taxable event, and the employee does not have to pay any taxes at this point. 

When RSUs Vest 

At the point when RSUs vest, the employee has to declare income tax on the FMV of the shares vested as salary income for that financial year, and pay taxes accordingly. It falls under the same bracket as regular salary, so taxes would be due according to the same tax slabs. 

When RSUs Are Sold 

When the vested RSUs are eventually sold, the employee will have to additionally declare capital gains or losses based on the difference between the sale price and the FMV at the point of vesting. The capital gains tax depends on whether the sale happens before or after 1 year of vesting since long term capital gains tax slabs are lower than short term ones. If the FMV at the point of vesting was higher than the sale price, the employee would be able to claim long term capital losses as well. 

Things To Remember About RSU Taxation

The grant of RSUs does not incur any tax liability, only their vesting and subsequent sale. 

At the point of vesting, the FMV of the shares is considered to be salary income and taxed as such. 

The FMV at the point of vesting determines the cost of purchase of the shares for calculating capital gains or losses. 

The sale of RSUs can either result in capital gains or losses which have to be declared separately. 

Even if an employer deducts TDS, employees still have to file their own tax returns and ensure everything is in order since there are additional points of taxation beyond regular salary. 

Keeping track of all relevant documents at each stage is very important to ensure that the taxes are filed correctly and without issues. 

Part 3 – 15 Common Mistakes While Reporting RSU Income in India

Common Mistakes While Reporting RSUs in ITR 

Taxpayers often make mistakes while filing taxes on their Restricted Stock Units (RSUs) due to the nuanced taxation of RSUs at multiple points – vesting, holding and selling. Below are the most common mistakes which can be avoided: 

Mistake 1: Confusion between the grant and vesting date of RSUs 

There is no taxability upon grant of RSUs. The taxability arises on vesting of RSUs. Hence, it is important to track the vesting details of RSUs using the vesting statement provided by the employer. 

Mistake 2: Treating RSUs as exempted income 

The value of the vested RSUs is considered as salary income and is subject to income tax at the time of vesting, not upon sale. 

Mistake 3: Incorrect use of Fair Market Value (FMV) 

The FMV at the time of vesting determines the salary income and the cost of acquisition. Hence, it is critical to ensure correct FMV as on the vesting date has been used to calculate the salary, cost of acquisition, and capital gains (if any). 

Mistake 4: Incorrect computation of cost of acquisition of shares 

The cost of acquisition of shares would be the FMV at the time of vesting as compared to the FMV at the time of grant or sale. 

Mistake 5: Incorrect computation of capital gains 

The capital gains would be the consideration received upon sale less the cost of acquisition. It is important not to mix up the value of consideration received and the cost of acquisition while computing capital gains. 

Mistake 6: Not disclosing foreign assets 

If the RSUs are in the foreign (listed) company, it may be required to disclose as foreign assets in Schedule FA. 

Mistake 7: Not claiming foreign tax credit 

In case of tax paid in foreign country on the income from the RSUs, the taxpayer may be eligible to claim a foreign tax credit under section 91(2). 

Mistake 8: Wrong exchange rate while converting foreign currency income to INR 

While converting the foreign currency income to INR, the taxpayer should use the prescribed exchange rate for the month. 

Mistake 9: Assuming that the tax deducted by the employer has covered all the tax dues 

Although the employer may withhold tax from the salary, RSUs income and capital gains (if any) are the responsibility of the taxpayer to report and pay tax. 

Mistake 10: Not considering the residential status 

The residential status may impact the taxability of the foreign income. As such, it is critical to evaluate the status correctly in light of the applicable tax treaties. 

Mistake 11: Not filing the tax return in correct ITR form or schedule 

Depending upon the nature of income, the taxpayer needs to select the appropriate ITR form and the related schedules. 

Mistake 12: Lack of proper documentation 

The taxpayer should maintain all relevant documents including the RSU agreement, vesting statement, sale confirmation, salary TDS certificate, and others to support the income and expenses. 

Mistake 13: Last minute filing of returns leading to avoidable mistakes 

It is advised that the taxpayer should file their returns well before the due date to avoid last minute mistakes. 

Mistake 14: Reporting of income in incorrect assessment year 

The taxpayer should ensure that the income is reported in the correct assessment year to avoid processing delays. 

Mistake 15: Not taking advantage of the double taxation relief available 

The income from RSUs may be subject to tax in both India and the foreign country. The taxpayer should take advantage of any applicable tax treaty to claim relief from double taxation. 

Common mistakes summary

Below is a summary of the common mistakes and corrective actions: 

Verification 

Check if the vesting dates of RSUs have been correctly taken into account and compared to the salary income. 

Confirm that the correct FMV was used to compute the salary, cost of acquisition, and capital gains (if any). 

Ensure that the computation of capital gains has been done correctly for each RSU. 

Check if all supporting documents (broker statements, sale confirmations) have been correctly taken into account. 

Check if all relevant foreign tax information and documentation has been reported and attached as evidence. 

Confirm if the taxability of foreign assets (such as RSUs in a foreign company) has been taken into account. 

Check if the correct ITR form and schedules have been filed. 

Finally, ensure that all required documents have been filed before the due date. 

The above mistakes have one common theme – the taxpayer needs to check the RSUs vesting statements and related tax documentation against the brokerage statements, salary slips, and TDS certificate to ensure nothing has been missed out. To facilitate this process, it is always a good idea to make a note/spreadsheet of the vesting dates, FMV, taxes withheld, and shares sold.