RSU Taxation

What Are RSUs?

Restricted Stock Units (RSUs) are a form of equity compensation granted by employers — typically technology companies and large corporations — to employees. An RSU is a promise to deliver company shares (or their cash equivalent) once specified vesting conditions are met, usually continued employment over a period of 1–4 years.

Unlike stock options, RSUs are never “worth zero” — they have value as long as the company’s stock price is above zero. This makes them lower-risk than options but typically offered in smaller quantities.

How RSU Taxation Works

RSUs are taxed differently from salary, and the timing is critical: tax is triggered at vesting, not grant.

1. Grant Date

When your employer grants you RSUs, there is typically no tax event. The RSUs are a promise of future income, not current income.

2. Vesting Date — The Tax Event

When RSUs vest, the fair market value (FMV) of the vested shares on the vesting date is treated as ordinary employment income in most countries. This income is subject to:

• Income tax at your marginal rate
• Social security contributions (NI, FICA, CPP, etc.)
• Any local/state taxes

Example: 500 RSUs vest when the share price is $50. You have $25,000 of ordinary income, taxed exactly as if you received a $25,000 bonus.

3. Sale Date — Capital Gains

When you eventually sell the shares, any gain or loss from the vesting price is a capital gain or loss, not employment income.

• Sold at $55 (above $50 vest price): $5 × 500 = $2,500 capital gain
• Sold at $45 (below $50 vest price): $2,500 capital loss

The cost basis of your shares is the FMV at vesting — not $0. This is a common misconception that leads to overpaying capital gains tax.

RSU Taxation by Country

United States

RSU income at vesting is subject to:

• Federal income tax: At your marginal rate (up to 37%)
• FICA (Social Security + Medicare): 7.65% up to the wage base, then 1.45%
• State income tax: Varies widely; California applies up to 13.3%

Employers typically withhold at a flat supplemental rate of 22% (federal) for RSU income, regardless of your actual bracket. If you are in the 32%, 35%, or 37% bracket, you will be under-withheld and owe additional tax at filing.

Sell-to-cover: Many employers automatically sell enough shares at vesting to cover the withholding tax, delivering the net shares. This does not eliminate your filing obligation — you may still owe more.

Key planning point: Make estimated tax payments if your employer’s flat withholding rate is below your marginal rate. Use IRS Form W-4 or quarterly Form 1040-ES.

United Kingdom

RSU income at vesting is subject to:

• Income tax at your marginal rate (20%, 40%, or 45%)
• National Insurance (8% up to UEL, 2% above)
• Employer NI: 15% on the RSU value — often reimbursed by the employee via a PAYE Settlement Agreement or deducted from shares

If the RSU scheme is a UK-approved Share Incentive Plan (SIP) or SAYE scheme, different (more favourable) rules apply. Unapproved RSUs (most US-company grants) follow the standard employment income rules.

India

RSU income at vesting is perquisite income (a taxable benefit) added to salary:

• Taxed at slab rates under the head “Salaries”
• Employer should deduct TDS on the perquisite value at vesting
• Perquisite value: FMV on vesting date (as determined by a Category I Merchant Banker) minus amount paid by employee (usually nil for RSUs)

At sale, capital gains apply:

• Listed foreign shares (held on US exchange): Treated as foreign assets; gains taxed as per applicable LTCG/STCG rules for unlisted shares
• Short-term (< 24 months): Taxed at slab rates
• Long-term (≥ 24 months): Taxed at 12.5% without indexation

Foreign asset and income reporting requirements (Schedule FA, Schedule FSI in ITR) apply. RSU grants and vested shares held in foreign accounts must be reported under FEMA and the Black Money Act.

Canada

RSU income at vesting is employment income under Section 7 of the Income Tax Act:

• Added to T4 and taxed at marginal rates
• Subject to CPP and EI contributions

On sale, the adjusted cost base (ACB) is the FMV at vesting. Any subsequent gain is a capital gain (50% / 66.7% inclusion rate depending on size).

Canadian residents receiving RSUs from non-Canadian companies should track the vest date and FMV carefully — the employer may not handle Canadian payroll obligations automatically.

Australia

RSU income at vesting is subject to the Employee Share Scheme (ESS) rules:

• Assessable at the discount (FMV at vesting minus cost to employee, usually nil)
• Reported on annual tax return as “ESS income” in the year of vesting
• Taxed at marginal rates (plus Medicare Levy)

On subsequent sale, CGT applies from the vesting date as cost basis.

The Most Common RSU Tax Mistakes

1. Treating the full sale proceeds as income: Only the gain above vest price is a capital gain. The vest value was already taxed as income.
2. Ignoring under-withholding: The flat 22% federal withholding (US) is lower than the top brackets. Higher earners must make estimated payments.
3. Not tracking the cost basis per lot: RSUs vest in tranches. Each lot has a different cost basis (different vest date and price). Mixing these causes errors on Schedule D.
4. Forgetting about state tax on remote work: If you vest RSUs while working in a different state from where you live, you may owe source-state tax even after moving.
5. India: Not reporting foreign assets: Indian residents holding vested shares in a US brokerage must report these in Schedule FA of their ITR annually.

Key Takeaway

RSUs are straightforward in principle but complex in execution: income is taxed as ordinary employment income at vesting, and only subsequent appreciation is a capital gain. The tax can be substantial — a $100,000 RSU vest in a high-tax US state could result in $45,000+ of federal + state + payroll tax. Plan ahead, verify your employer’s withholding rate, and track your cost basis carefully.