How RSUs and ESOPs Are Taxed in India

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Equity compensation is one of the most misunderstood parts of a salaried person's tax return. RSUs, ESOPs and ESPPs are taxed in two separate stages, often in different years, and when the shares are listed abroad there are extra reporting duties. This article walks through the whole lifecycle for FY 2025-26 (AY 2026-27).

The two taxable events

Whatever the instrument, equity compensation is taxed at two points:

• At vesting / exercise — taxed as salary (perquisite). The fair market value (FMV) of the shares on the vesting date (for RSUs) or the difference between FMV and your exercise price (for ESOPs) is a perquisite under Section 17(2). It is added to your salary and taxed at your slab rate.
• At sale — taxed as capital gains. When you later sell, the difference between the sale price and the FMV that was already taxed as perquisite is a capital gain (or loss). The FMV at vesting becomes your cost of acquisition, so you are not taxed twice on the same amount.

Stage 1: perquisite tax at vesting

On the vesting date, your employer values the shares and adds that amount to your salary. Because it is part of salary, the company must deduct TDS on it. Most companies use a sell-to-cover approach — they automatically sell enough shares to cover the tax and give you the rest. The full perquisite value and the TDS both show up in your Form 16 (Part B) and Form 26AS, and the perquisite detail also appears in Form 12BA. When you file, this amount is already inside your salary figure; do not add it again.

For unlisted or foreign shares, the FMV is generally determined by a merchant banker's valuation on the vesting/exercise date. For shares listed on a recognised Indian exchange, it is the average of the day's high and low price.

Stage 2: capital gains at sale

When you sell, your gain is sale price minus the FMV already taxed at vesting (minus brokerage/fees). The rate depends on where the shares are listed and how long you held them after vesting:

This is the single most common mistake with US RSUs: people assume the 12.5% concessional equity rate and the ₹1.25 lakh exemption apply. They do not — those are only for shares listed on an Indian exchange with STT. Foreign shares held short-term are taxed at your full slab rate.

Foreign shares: Schedule FA and double tax

If you are a resident and ordinarily resident (ROR), you must disclose all foreign assets — including vested-but-unsold RSUs and ESPP shares — in Schedule FA of ITR-2 or ITR-3, regardless of whether you sold anything or made a gain. Non-disclosure carries heavy penalties under the Black Money Act, so this schedule is not optional.

Dividends on US shares usually suffer 25% US withholding tax. India taxes the same dividend too, but you can claim foreign tax credit (FTC) under the India-US DTAA by filing Form 67 before you file your return. The same FTC mechanism applies if US tax is withheld on a sale.

ESPP: the discount is also a perquisite

Under an Employee Stock Purchase Plan (ESPP) you buy shares at a discount, often with a look-back. The discount (FMV on purchase date minus what you paid) is a salary perquisite taxed at purchase; the later gain from that FMV to sale price is capital gains — exactly the same two-stage pattern as RSUs.

Which ITR form and how to file

Holding foreign shares or reporting capital gains generally pushes you from ITR-1 to ITR-2 (or ITR-3 if you also have business income). Read our guide on which ITR form to file, use the capital gains guide for the rate detail, and estimate the overall liability with the ITR calculator. Keep your broker statements, vesting reports and Form 12BA handy so your capital-gains cost matches the perquisite already taxed.