RSU Taxation in India: Foreign Tax Credit, Form No. 67 and Disclosure of Foreign Assets Under the Income Tax Act 1961

Overview

The rapid globalisation of workforce structures has fundamentally altered how multinational employers compensate their Indian resident employees. Equity-linked remuneration instruments — particularly Restricted Stock Units — have become commonplace across technology, finance, and manufacturing sectors. From an Indian tax standpoint, these instruments trigger obligations at multiple stages: at vesting, upon sale, and at the level of return filing through specialised disclosure schedules.

This article offers a structured examination of how RSUs are taxed under the Income Tax Act 1961, how double taxation is mitigated through the Foreign Tax Credit framework under Section 90 and Section 91 read with Rule 128 of the Income-tax Rules, 1962, and what disclosures are mandated under Schedule FSI, Schedule TR, and Schedule FA. Additionally, the article examines judicial developments that have shaped the interpretation of Form No. 67 compliance and the consequences of non-reporting under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Part I: Understanding Restricted Stock Units and Their Tax Character

What Are RSUs?

Restricted Stock Units represent a contractual commitment by an employer to allot a specified number of company shares to an employee upon fulfilment of defined vesting conditions. Unlike Employee Stock Options, which grant a right to purchase shares at a predetermined price, RSUs result in automatic share allotment once vesting conditions are met.

Typical vesting triggers include:

• Continuous employment over a stipulated period
• Achievement of individual or organisational performance benchmarks
• Satisfaction of a combination of time-based and target-based milestones

Upon vesting, the employee acquires beneficial ownership of the shares and is exposed to taxation under Indian law.

Two-Stage Taxation of RSUs

RSUs create taxable events at two distinct points:

1. At the time of vesting — the fair market value of allotted shares constitutes a perquisite taxable as salary income
2. At the time of sale — any appreciation in value beyond the vested price is chargeable as capital gains

Part II: Taxation at the Time of Vesting

Statutory Framework

Section 15 of the Income Tax Act 1961 brings salary income to charge on the basis of due date or receipt, whichever is earlier. Section 17(2) extends the definition of "perquisites" to include the value of any specified security or sweat equity shares allotted — directly or indirectly — by the employer to an employee.

Accordingly, the perquisite value on RSU vesting is computed as:

Perquisite Value = Fair Market Value on Vesting Date − Amount Recovered from Employee

This amount is included in the assessee's salary income and taxed at applicable slab rates.

Illustrative Computation

Consider Mr. Sharma, a Resident and Ordinarily Resident employee of a US-based multinational:

The amount of USD 9,000 is converted into Indian Rupees in accordance with Rule 115 of the Income-tax Rules, 1962 and offered to tax under "Income from Salaries".

In several jurisdictions, particularly the United States, taxes are withheld at source on such perquisite income. This creates a scenario of double taxation — the same income becoming chargeable in both the source country and India — necessitating relief under Section 90 or Section 91.

Part III: Taxation at the Time of Sale

Capital Gains on Disposal of RSU Shares

Once the shares acquired pursuant to RSU vesting are subsequently sold, the provisions of Chapter IV-E of the Income Tax Act 1961 are attracted. Section 45 provides that profits arising from the transfer of a capital asset are chargeable under the head "Capital Gains".

The taxable gain is the difference between the sale consideration received and the cost of acquisition of such shares.

Cost of Acquisition Under Section 49(2AA)

To prevent the same amount from being taxed twice — once as salary and again as capital gains — the Finance Act, 2009 inserted Section 49(2AA). This provision deems the Fair Market Value that was considered for perquisite taxation under Section 17(2) to be the cost of acquisition for capital gains purposes.

Cost of Acquisition = FMV considered under Section 17(2)

Illustrative Computation

Continuing with the example of Mr. Sharma:

Classification of Capital Gains

The character of the gain — short-term or long-term — depends on the holding period of shares from the date of vesting. The applicable rate of tax will vary based on:

• Nature of the asset (listed or unlisted)
• Place of listing (Indian or foreign exchange)
• Relevant provisions of the Income Tax Act 1961

Part IV: Foreign Tax Credit — Sections 90 and 91

Relief Under Section 90 — Countries with DTAA

Section 90 authorises the Central Government to enter into Double Taxation Avoidance Agreements (DTAAs) with foreign nations. Section 90(2) further provides that where both the Act and the applicable agreement are operative, the assessee may elect whichever is more beneficial.

India has operational DTAAs with numerous countries including the United States of America, the United Kingdom, Canada, Australia, Singapore, and Germany, among others.

Quantum of Foreign Tax Credit:

The credit is restricted to the lower of:

• Foreign tax actually paid; or
• Indian tax attributable to such foreign income

Illustration: