RSU and ESOP Taxation under Income-tax Act, 2025 – Salary and Capital Gains Explained

Employee stock compensation such as Employee Stock Options (ESOPs) and Restricted Stock Units (RSUs) can create tax liability at more than one stage.

Typically, the employee is first taxed under the head “Salaries” when shares are allotted or transferred under the employee compensation arrangement. If those shares are subsequently sold, any further increase or decrease in their value is considered under “Capital gains.”

The Income-tax Act, 2025 retains this broad framework, although the relevant section numbers have changed. It is therefore important to distinguish the salary component from the capital-gains component and use the correct fair market value and holding period.

What is the difference between an ESOP and an RSU?

An ESOP generally gives an employee the right to acquire shares of the employer or its group company at a predetermined exercise price after satisfying specified vesting conditions.

The typical ESOP sequence is:

Grant → Vesting → Exercise → Allotment/Transfer of Shares → Sale

An RSU, on the other hand, generally represents a promise to deliver shares after specified vesting conditions are met. In many RSU plans, the employee does not have to pay an exercise price.

The Income-tax Act, 2025 does not separately define the commercial term “RSU”. Accordingly, the exact tax treatment depends on the terms of the particular award.

Where vested RSUs are settled by allotting or transferring shares to the employee free of cost, the employee-stock perquisite provisions may apply. A cash-settled RSU can have a different treatment because the employee does not acquire the underlying shares.

ESOP taxation under the Income-tax Act, 2025

Section 17(1)(d) of the Income-tax Act, 2025 includes within taxable perquisites the value of specified securities or sweat equity shares allotted or transferred, directly or indirectly, by a current or former employer either free of cost or at a concessional rate.

The taxable value is broadly determined with reference to the fair market value (FMV) on the date on which the option is exercised, less the amount paid or recovered from the employee.

Therefore, an ESOP commonly involves two separate stages of taxation:

This mechanism is important because the amount already considered for salary taxation generally becomes the cost base while calculating capital gains.

Corresponding provisions under the old and new Income-tax Acts

How is the taxable ESOP perquisite calculated?

Consider an employee who exercises 1,000 ESOPs.

• Exercise price: ₹200 per share
• FMV on the relevant exercise date: ₹800 per share

The taxable salary perquisite would broadly be:

(₹800 − ₹200) × 1,000 = ₹6,00,000

The ₹6,00,000 is included in salary income and taxed at the employee's applicable income-tax rates.

The employer is generally responsible for deducting tax from salary under Section 392 of the Income-tax Act, 2025, subject to the provisions applicable to the employee and the nature of the perquisite.

How is fair market value determined?

The Income-tax Rules, 2026 prescribe valuation rules for specified securities allotted or transferred to employees.

The valuation requirement can be particularly important where employees receive shares of an overseas parent company.

How are RSUs taxed?

RSUs require additional care because their mechanics can differ from conventional ESOPs.

For a typical share-settled RSU, the employee may receive shares without paying anything when the award vests and is settled. Where the arrangement results in shares being allotted or transferred by the employer or former employer free of cost, the employee-security perquisite provisions of Section 17(1)(d) may apply.

For example, suppose 500 RSUs settle into 500 shares and the value considered under the applicable tax rules is ₹1,000 per share. If the employee pays nothing:

Taxable salary perquisite = 500 × ₹1,000 = ₹5,00,000

However, vesting should not automatically be treated as the statutory tax point in every RSU plan. Some plans have a gap between vesting and actual settlement or transfer. The award documents and settlement mechanics should therefore be reviewed.

What happens when ESOP or RSU shares are sold?

Once the employee owns the shares, their subsequent sale is a separate capital-gains transaction.

Under Section 73(1), Table Sl. No. 4 of the Income-tax Act, 2025, the cost of acquisition of specified securities or sweat equity shares covered by Section 17(1)(d) is broadly the fair market value already taken into account while determining the salary perquisite.

Continuing the earlier ESOP example:

• FMV used for salary taxation: ₹800 per share
• Number of shares: 1,000
• Later sale price: ₹1,100 per share

The capital gain before eligible transfer expenses would broadly be:

(₹1,100 − ₹800) × 1,000 = ₹3,00,000

The employee is therefore not taxed again on the entire difference between the original exercise price of ₹200 and the sale price of ₹1,100 as capital gains.

The benefit of ₹600 per share had already been considered under salary. Only the subsequent ₹300 per share appreciation is considered while computing capital gains.

How is the holding period calculated?

For employer-provided specified securities and sweat equity shares, the holding period is generally reckoned from the date of allotment or transfer of the shares.

Under Section 2(101) of the Income-tax Act, 2025, the general holding-period threshold is 24 months. Certain securities listed on a recognised stock exchange in India qualify for a shorter 12-month threshold, subject to the statutory conditions.

Foreign ESOPs and RSUs – 12 months or 24 months?

Employees of Indian subsidiaries frequently receive ESOPs or RSUs of a US, UK or other overseas parent company.

Merely because such shares are listed on NASDAQ, NYSE or another overseas exchange does not automatically give them the 12-month holding period applicable to securities listed on a recognised stock exchange in India.

Accordingly, foreign-company shares that are not listed on a recognised stock exchange in India would generally fall within the 24-month holding-period rule.

Capital-gains tax rates on foreign ESOP or RSU shares

Where foreign-company shares do not satisfy the conditions for the special Indian listed-equity provisions, the general capital-gains rules apply.

• Short-term capital gains: Generally taxable at the taxpayer's applicable normal rates where the special listed-equity provision does not apply.
• Long-term capital gains: General long-term capital gains falling under Section 197 are generally taxable at 12.5%, subject to applicable statutory conditions, surcharge and cess.

The special provisions for qualifying listed equity should not automatically be applied to foreign shares merely because those shares are listed on an overseas stock exchange.

Special relief for employees of eligible start-ups

The Income-tax Act, 2025 continues a special mechanism under which employees of qualifying eligible start-ups can defer payment or deduction of tax on specified ESOP perquisites.

Section 392(3) deals with the employer's tax deduction obligation, while Section 289(3) deals with the timing of the employee's related tax liability.

For qualifying shares allotted or transferred under the new Act, the tax becomes payable within 14 days from the earliest of:

• Expiry of 60 months from the end of the relevant tax year
• Sale of the specified security or sweat equity share or
• Cessation of employment with the employer that allotted or transferred the shares

This benefit is available only where the statutory conditions relating to an eligible start-up are satisfied. It is not a general tax-deferral facility available for every ESOP plan.

Foreign asset reporting for overseas RSUs and ESOP shares

Employees receiving shares of an overseas parent company must consider not only taxation but also foreign-asset disclosure requirements.

Once foreign shares, brokerage or custodial accounts, or other reportable overseas financial interests are held, a resident taxpayer may have additional disclosure requirements in the income-tax return depending on residential status and the nature of the asset.

Taxpayers should therefore reconcile foreign stock compensation with:

• Employer stock-plan statements
• Broker or custodian statements
• Grant and vesting documents
• Dividend statements
• Sale confirmations and
• Foreign tax documents, where applicable.

What if the employee worked in more than one country?

Cross-border employees can face additional complications where an ESOP or RSU award relates to services performed partly in India and partly outside India.

Depending on the facts, it may be necessary to examine:

• Residential status of the employee;
• Period of employment or service in India and overseas;
• Vesting period of the stock award;
• Terms of the applicable Double Taxation Avoidance Agreement (DTAA);
• Foreign taxes paid; and
• Eligibility for foreign tax credit.

The entire stock award should therefore not automatically be assumed to be either fully taxable or fully non-taxable in India merely because the shares have been issued by a foreign company.

Common mistakes while reporting RSUs and ESOPs

• Treating the grant date as the taxable event without examining the stock plan.
• Assuming every RSU becomes taxable merely on vesting without checking the actual settlement or transfer mechanism.
• Using the ESOP exercise price instead of the prescribed FMV as the capital-gains cost of acquisition.
• Applying the 12-month Indian listed-share holding period to shares listed only on foreign stock exchanges.
• Taxing the entire sale proceeds again as capital gains.
• Ignoring foreign-asset and foreign-account disclosures.
• Failing to reconcile the amount reported by the employer with stock-plan and broker statements.

Documents employees should preserve

• ESOP or RSU grant letter
• Vesting schedule
• Exercise statement, where applicable
• Share allotment or settlement statement
• Employer's perquisite computation
• FMV certificate or valuation statement
• Form 16 and relevant salary statements
• Foreign broker or custodian statements
• Sale contract notes or transaction confirmations
• Dividend statements and
• Foreign tax payment documents, where applicable.

Key takeaway

RSUs and ESOPs should generally be viewed as involving two distinct tax stages.

1. Salary stage: The benefit represented by employer-provided shares can be taxable as a salary perquisite under Section 17(1)(d).
2. Capital-gains stage: When the employee eventually sells the shares, the subsequent gain over the prescribed cost of acquisition is considered under capital gains.

For foreign-company shares, additional attention may be required for the 24-month holding period, foreign-asset disclosures, overseas brokerage accounts, currency conversion, foreign tax credit and cross-border service periods.

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