Jagoinvestor

March 25, 2013

RSU, ESPP and ESOP – Understanding Meaning and Taxation

Most of the people who join their first job,  get benefits like RSU, ESOP and ESPP as part of their CTC package (infact this is how employers show a high CTC while recruiting).However most of the employees do not understand these things in the beginning. Over the next few months, they start getting some knowledge about these benefits as employee.

A lot of people confuse these 3 things with each other and often do not have a full understanding of what they mean and how they work and what are the tax implications when they exercise their benefits.We will now take each one of these and understand them.

employee benefits RSU ESOP ESPP India

In this articles lets understand all these 3 things – RSU , ESOP and ESPP in detail.

1. RSU (Restricted Stock Units)ESOP

RSU or Restricted Stocks units are very simple to understand. The Company gives company Stock to an employee without any conditions, however there is a vesting period involved. Vesting Period is the tenure for which you will have to wait, before you can claim those shares. So if a company gives you 100 RSU vesting in 2 yrs. That simply means that after 2 yrs, you will get 100 stocks of the company. It will be all yours and you are free to keep them or sell them after that. RSU’s are also a great way to reward the employees, like in 2012 WIPRO awarded 4.5 million RSU’s to its 1200 employees (mostly top management).

RSU’s are a great way to make sure that the employee stays with the employer for long term. Imagine a company, who gives 1000 RSU’s vesting in 4 yrs. An employee will thinking many times before changing his job, because if he leaves the job and moves to another company, then he will loose those RSU’s, which might be worth a lot of money depending on the stock price. I had myself got RSUs from Yahoo, when I joined them, but due to their declining stock price over so many years, RSUs were not a great motivator for me. It was just a bonus amount for myself.

RSU can also be given in phased manner sometimes, like 25% RSU each year. So if company is giving 100 RSU’s with condition of 25% RSU vesting each year, then 25 shares will vest in first year, then another 25% in 2nd year and like this, only after 4th year, an employee will be able to get all 100 stocks.

Its worth noting that if you leave a job, a lot of companies require you to sell your RSU’s in next few months. for example next 3 months.

2. ESOP (Employee Stock Options)

Employee Stock Options or ESOP are generally given by most of the big companies in India, especially IT companies which are listed outside India. ESOPs are nothing but “OPTIONS”, which are also in stock market in India (remember Future & Options?)

Let me tell you what Stock Options are in general. If a person has a Stock Option, he actually has a right to BUY a stock in future at a pre-decided price agreed at the time of giving those stock options. So in future whatever is the market price does not matter, you always have an option to buy it at the price which was agreed upon. In this case if market price of the stock is above the pre-decided price, then you can just exercise your options of buying the stock and instantly you will be in profit. If however, the current market price is less than the pre-decided price, then you choose not to exercise the stock option at all and nothing happens.

Let me give you an example. Let’s say that an employee joins a company on 1st Jan 2013. His company gives him 500 ESOPs with vesting period of 3 yrs and at the vesting price of Rs 200. What this means is that his vesting date is 1st Jan 2016 (after 3 yrs) , On that date, he has a OPTION to buy 500 stocks of the company at Rs 200 if he wishes. Now lets say on 1st Jan 2016 …

Case 1 – The stock price is Rs 800

In this case, the employee can exercise his option and he can get 500 stocks at only Rs 200 . At this moment, the employee will make a clean profit of Rs 600 each shares and a cool Rs 3,00,000 . Note that he does not have to pay anything here, when he exercises his option, he will automatically get his profit without putting anything from his pocket. It makes sense to exercise his option in this case, because vesting price is less than market price.

Case 2 – The stock price is Rs 130

In this case, it does not make any sense to exercise, because you will be in loss, because the price you have to pay is less than market price, so you let this option go.

Note : In case of stock options, you can never make any loss, it will always be some profit only.

3. ESPP (Employee Share Purchase Plan)

ESPP or Employee Share Purchase Plan is a benefit given by employer to its employees to purchase the stock of the company at a discounted price. In an ESPP plan, an employee has to contribute a part of this salary in ESPP plan each month. An employee can choose how much of his salary he wants to contribute by himself. It can range from 1% to 15% of his salary. All the money which he contributes gets accumulated for few months and then in one go, stocks are purchased for him at some discounted price. On what price the discount will be given depends on your company EPSS plan. However in general its the minimum of the prices in the start of the EPSS plan and at the end of the ESPP plan. Let me give you an example.

Suppose your company offers a ESPP plan twice a year which you can opt for, one window opens is Jan-June (where you can join in Jan only) and other is July to Dec (You can join in July only). So you will have to tell the company how much you want to contribute each month before hand. If you choose it to be 10% , then 10% of your salary will be cut for ESPP plan and you will get the rest in your hand.

Now suppose a person chooses Jan-June window and he is contributing 10,000 a month for this, then in next 6 months, he will accumulate Rs 60,000 for ESPP, and now at the end of the Plan he will be able to get the shares.

What will be the share price considered for him ? 

Let’s say that the stock price in the start of the plan (Jan month) was Rs 100 and the stock price at the end of the plan (June) was Rs 120. Then the stock price considered for him will be minimum of 100 and 120 , which is Rs 100 and on this he will get 15% additional discount and his final price would be Rs 85 only.

Note that this example is assuming that minimum of two is taken , your company EPSS might just consider the “starting price” or “ending price” .. So please look at your company EPSS plan in detail.

When to choose ESPP plan ?

ESPP is a great way to get the stock price at discount, but one should anyways take care of few things. If company’s future prospects look great in future, then one should buy the stocks anyway, so ESPP becomes a great deal where you sure shot get 15% discount. However if company’s prospects look bad in future, then you have to figure out if it’d make any sense to go for ESPP plan or  make a better use of your money elsewhere.

Below is a video from Salesforce which explains their ESPP plan, watch it to get a feel of how EPSS works ?

 

Taxation on RSU, ESOPs and ESPP

The taxation for RSU, ESOP’s and ESPP is governed by same rules, as all of them have to deal with stocks which a employee acquires and the taxation is pretty simple to understand. There are just two rules.

Tax to be paid in India

When you sell the your RSU/ESOP/ESPP (after vesting period is over) and get back the money, its your responsibility to pay the tax on the amount in India. How much tax is to be paid by you, depends on the nature of the gains. If you sell the shares before 1 year of acquiring the shares, then the gains are called Short Term Capital Gains (STCG) and if you sell the shares after 1 year, then the gains will logically be Long Term Capital Gains.

If stocks are listed in indian stock exchanges, then you have just have to pay 15% tax on Short Term Capital Gains and no tax on long term capital gains. However if stocks are not listed on indian stock exchanges, but some foreign country, then you will have to add the short term capital gains tax in your income and pay tax as per your slab rate, and 20% with indexation on the long term capital gains, which is the case when STT is not paid when the transaction is done.

Below is the simple table which will explain things to you

[table]

Listed/Gain-Type Short Term Capital Gain (Less than 1 yr) Long Term Capital Gain (More than 1 yr)
Stocks Listed on Indian Stock Exchange 15% Tax on Profits No Tax
Stocks NOT  Listed on Indian Stock Exchange Profits will be treated as your Income and taxed as per your Slab 20% with Indexation

[/table]

Incase Stocks are listed on Foreign Stock Exchange

In these cases, it might happen that when you sell your RSU, ESOP’s or ESPP, the tax is directly cut by the trading portal like etrade (in US) and you only get reduced number of units (after tax). After that when you take the money back in India, you might have to pay the tax on the income again if the double tax treaty is not available with that country.

I hope, you got a lot of clarity about RSU (Restricted Stock Units), ESOPs (Employee Stock Options) , ESPP (Employee Share Purchase Plan). These are some of the benefits employees get and understanding them is very critical for them. Please share if you have any of these benefits and if you had any confusion around them?

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162 Comments
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Anand
Anand
3 years ago

Hi Manish,
It was a great article. I really appreciate it. Most of my doubts were cleared. But I still have one question.
Here is my detailed scenario/ background
I am Indian Tax Payer and working in US based company which is listed on NASDAQ,
In my case, both countries, INDIA and U.S. has tax treaty rule. So double taxation won’t happen.
I receive RSU, when the shares gets exercise, I get less shared in my Demat account (e-trade in my case ) to adjust tax, then why value of all RSU are added in perquisite in form 16 as the tax has been paid in form of shares
Example let say 8 shares are vested but I get only 6 shares in my e trade account which I can sell.
and let say price is 50$ per share (70INR =1 USD ) , so 8*50*70=28000 INR is added as perquisite to my form 16.
My question is How DTA A rule works here

Rajan
Rajan
3 years ago

I am a fresher in India. I am getting 35lakhs from an Australian company as stocks in 4 years. 25% each year. Can you please tell me how much money will I get per year if I decide to sell the stocks and bring that money to India?

Hinal
Hinal
7 years ago

Hi Manish,

My query is whether a private limited company can give an Employee Share Purchase Plan?

suvro
suvro
7 years ago

While exercising the option, if the strike/exercise price is less than FVM, will any tax liability appear?

Aruna
Aruna
7 years ago

Hi sir
I need clarification regarding RSUs for calculate capital gain RSUs exercised is 76 infromation regarding exercised RSUs is
Disbursement Details
Gross Proceeds $1658.16
Commission is $19.95
SEC Fee is $0.04
Taxes Withheld $1566.42
Net Proceeds $71.75
Execution price is $96.09
In this case he sold 24 units
How to calculate Gross Sale Value????
no.of shares sold*Execution Price=Sale value is it correct
24*69.09=1658.16
Purchase Value how to calaculate????

Arun
Arun
7 years ago

I work in a US based privately owned (unlisted) company. I was given some share options (ESOP) in 2012. I did not have to pay the grant price back then (so my cost of acquisition was nil). The options have fully vested now in the past four years. If I were to exercise these now I will have to pay the exercise cost (grant price) and the company will buy it at the Fair Market Value. Wouldn’t I have to mention this in ITR in the year that I actually exercise my option? Do I need to show this in the FA schedule section D in the ITR, given that my cost of acquisition is nil and there isn’t any income derived from it? I haven’t mentioned this in previous years until now. Also as you have mentioned, will the applicable tax be 20% with indexation since its been 4 years now?

Anurag
Anurag
8 years ago

Hi Manish,
This is an immensely informative article. I have a question regarding same and I could not get the answer despite googling it. 🙂
If I have RSU (list in US) and sell the same, I incur some cost for brokerage and other expenses. Can I reduce those expenses from my taxable income in India?
Thanks for all the help!!!

Ankish
Ankish
Reply to  Anurag
7 years ago

If you are resident of India, then your global income is taxable in india. so when you sold the RSUs in US then it is taxable under the head Capital Gains. Hence you can claim the expense of brokerage.

Ram
Ram
8 years ago

if some RS. of RSU are mentioned in CTC then whether that RSU are given on First Year of Employment or for every year? Please Reply me…
Thank You

Sudheer
Sudheer
8 years ago

Dear Manish,
I think there is a small correction required in the table you have given. For ESPP and RSU for shares listed in foreign stock exchange, if one has to get a Long Term Capital Gains benefit, the shares have to be held for more than 36 months. This is because they are not listed in a recognized stock exchange where STT is paid, as per definition of IT.

Am I wrong ?

vinay
vinay
8 years ago

Hi Manish,

i’m asking same question asked by Ashok, can u please answer?

would like to know if ESPP should be shown in ITR2. These stocks are transacted on NASDAQ.
I have not sold these shares and TAX on Fair Market Value is already deducted from Source.
I’ve two queries:
I get dividends from my holding and how much is the tax liability . Do I need to declare this amount in ITR2? If yes, where?
I think I should show something in schedule FA-D or FSI of ITR2. please guide me?

ashok
ashok
8 years ago

I would like to know if ESPP should be shown in ITR2. These stocks are transacted on NASDAQ.
I have not sold these shares and TAX on Fair Market Value is already deducted from Source.
I’ve two queries:
I get dividends from my holding and how much is the tax liability . Do I need to declare this amount in ITR2? If yes, where?
I think I should show something in schedule FA-D or FSI of ITR2. please guide me?

Jitendra
Jitendra
8 years ago

Hi Manish,

Are these RSU/ESOPs considered as foreign assets for entry in ITR2?
How is the value calculated – is it on the last day of the financial year? What if I sold the vested shares before 31/Mar?
If yes, how is the value calculated for stocks which are not vested yet?

Thanks,
Jitendra

Jia
Jia
9 years ago

Hi Manish,

I am trying to compare actual profit an employee gets if he/she opts for RSU or stock options for shares of company listed in US

Say company gives 1000 stock options or 250 RSU which will be given in 4 years as 25% every year.
Option1: Opt for 250 RSU
I receive 62 shares(250/4) every year
let the value of each share be X$
Questions:
1.So will every year for next four years, 62*X$ be added to my total taxable income and I pay tax on it(as per my tax slab)?
2. As the stock is not listed in India and only listed in US, whenever I sell my shares, depending on if I sell it before one year or later,I again pay short term capital gain / long term capital gain respectively on the profit to Indian tax dept
3. I donot pay any tax in US(or get it refunded if deducted at the selling time) , as I already pay tax in India. Or do I still need to pay taxin US

Option2: Opt for stock options
Say grant price /agreed upon price is X$
I get an option to buy 250(1000/4) shares at the end of every year for four years
First year: If market price has increased say its now X+10$. Then I exercise my option and buy shares at X$. Whats the tax i pay here(I just buy dont sell anything)
2.If I sell this share within one year of receiving at X+15$ whats the amount i have to pay to India tax dept and amount to be paid to US tax dept
3..If I sell this share after one year of receiving at X+15$ whats the amount i have to pay to India tax dept and amount to be paid to US tax dept

Second year:Share prices has fallen down to X-2$. Hence I donot want to exercise my optionon this day. Does that mean I just lose on this 250 shares or can I wait and exercise this 250 shares after another 6 months or a year when share price goes up to X+5$

Third year:Price is higher and i exercise my option?

Thanks
Jia

Lokesh
Lokesh
9 years ago

Hi Manish,

For FY14-15 i have received RSU from my company(listed in US) as below

May 2014 – 2342 (@$3.87) = $905.58 = Rs 54,670
Aug 2014 – 747(@$4.12) = $3077.64 = Rs 187725.54

Total = Rs. 242395.54

I see this amount is mentioned in my IT computation as prerequisites and being taxed, i would like to know if this amount will be taxed even i have not exercised the stocks?

Unfortunately the stock price dropped to $2.37 so can’t excute it now and have to wait..

Thanks in advance.

BRs,
Lokesh

Aditya
Aditya
9 years ago

Hi Manish,

Is tax rate given above still valid for shares of US company listed in NASDAQ ?
Is there any change in duration of computing short term gain (less than 1 year) and long term gain ?
I am mean for RSU/ESPP for indian employee of US company,
Tax on short term gain (shares hold less than year) – In tax slab
Tax on long term gain (shares hold more than year) – 20 % with indexation
Or this duration is changed to 36 months ?
Please comment.

Thanks.

Sankar
Sankar
9 years ago

Hi,

I got awarded some RSUs when i was in India. By the time they got vested, I moved to US (intra-company transfer). But when the RSUs are vested, I was taxed for both India and US.
How and where can i get my tax returns? Please clarify. Appreciate your help in this regard.

Cheers!!
Sankar

Yash Pal Aggarwal
Yash Pal Aggarwal
9 years ago

My son an NRI working in USA & was offered ESOP,s of an Indian company. At the the time of exercising his option he paid the tax to the US Govt. ( I mean tax on the difference of FMV of shares traded at National Stock Exchange & the option price of Shares Indian Rupees ) Now he wants to sell his shares after holding them 2 years in NSE & STT has to be paid . My question of what would be his Tax implication in India as his long term gain in the situation he has paid the Tax as well as price of shares in USA in US Dollars. He converted the option price & FMV of Indian Rupees in US Dollars for the purpose of making payment in USA.

Vishwesh
Vishwesh
9 years ago

We had ESOPS with a US company which got vested and encashed due to acquisition. The original US company was not listed in US stock exchange as well. We got all the money in hand so tax deduction has not happened in US. Please note ESOPS issue date is more than 1 year old. How much tax do we have to pay on this ?

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Tax Accounting Espp
9 years ago

[…] RSU, ESPP and ESOP – Understanding Meaning and Taxation – Taxation on RSU, ESOPs and ESPP. The taxation for RSU, ESOP’s and ESPP is governed by same rules, as all of them have to deal with stocks which a employee …… […]

Amit
Amit
9 years ago

My company gave me RSU, which are listed in US. They opened a a/c for me with morgon stanley in US. I do have some vested RSUs in last financial year. My company already deducted tax on the vesting day and my Form-16 has the required entry.
Do I need to report it as a foreign account in ITR-2 – TA_FR section in type E?