RSU Taxation in India — A Beginner-Friendly Walk-Through (with Example)

TL;DR

1. Vest day → FMV is salary perquisite (shows as “RSU” on your payslip).
2. Sell-to-cover just funds that tax by selling some shares; it does not replace reporting.
3. When you later sell remaining shares, you owe capital-gains tax on the price move after vest.

1) Key terms in 90 seconds#

2) The flow (visual)#

• Perquisite is income (Salary).
• Sell-to-cover is only how the tax was paid for that income.
• Capital gain happens later, when you sell what’s left.

3) How to read your payslip (the part most people get wrong)#

Your payslip typically has three RSU-related lines:

• RSU → the full vest value (FMV × shares) added to salary income.
• RSU Ded → the offset after selling some shares to raise tax cash (think: “net RSU after cover”).
• Income Tax → the final TDS payroll deposited for the month (on salary + RSU).

Use these identities to reconcile any month:

SellToCover_cash(INR)  ≈  RSU  −  RSU_Ded
Cash_TDS_from_salary   =  Income_Tax  −  SellToCover_cash

That SellToCover cash is credited against your tax, not credited to your bank.

4) Why Shareworks can show >35.88%#

• Shareworks estimates tax at 35.88% per tranche to decide how many shares to sell.
• They must sell whole shares, and the price can move, so actual proceeds can exceed 35.88% (e.g., looks like 60–70%).
• Payroll then recomputes your actual income tax for the month using slabs/surcharge/cess on total income and adjusts (refund or top-up) in the payslip.

Some companies pre-withhold at a higher flat % (≈42.7%). Principle is the same: estimate now, true-up in payroll.

5) Worked example — vest, sell-to-cover, and a later sale#

5.1 Vest + payslip reconciliation (rounded numbers)#

• Assumptions: FMV on vest = ₹3,320/share; 100 shares vest. Shareworks target = 35.88%. Market sell price ≈ ₹3,300/share.

• Perquisite added to salary (payslip RSU): ₹3,320 × 100 = ₹3,32,000.

• Target withholding (to decide shares to sell): ₹3,32,000 × 35.88% = ₹1,19,850.

• Shares to sell (whole shares at ~₹3,300): ₹1,19,850 / 3,300 = 36.3 → sell 36 shares.

• Sell-to-cover proceeds: 36 × ₹3,300 = ₹1,18,800.

• Payslip lines you’d see (one possible layout):

  • RSU = ₹3,32,000
  • RSU Ded ≈ ₹2,13,200 (so that RSU − RSU Ded ≈ ₹1,18,800 = cash raised)
  • Income Tax for the month (salary + RSU) say ₹1,40,000
  • Then Cash TDS from salary = ₹1,40,000 − ₹1,18,800 = ₹21,200 (this is what actually reduced take-home as tax)

Your actual payslip wording may differ, but the math above always reconciles with the two identities.

5.2 Later sale of remaining shares (capital gains)#

• Remaining shares after sell-to-cover: 100 − 36 = 64.
• Cost basis per share = FMV on vest = ₹3,320 (this is what you were taxed on as salary).
• Suppose you sell 64 shares @ ₹5,410 after >24 months (LTCG case):

• Tax: LTCG on unlisted foreign equity is 20% with indexation (apply CII to the INR cost).
• If you sold within ≤24 months, it’s STCG at your slab (no indexation).

FX rule for foreign shares: convert both sale value and FMV/cost with SBI TT buying rate of the last day of the month preceding the sale month. Use the same for the vest month if payroll hasn’t already converted.

6) Exactly what goes into ITR-2#

Do not feed “RSU Ded” into ITR. It’s only the internal mechanism payroll used to fund TDS.

7) Quick checklist before you hit Submit#

• RSU total in payslips matches Perquisite in Form 16.
• Income Tax in payslips aggregates to Form 26AS TDS.
• Capital gains computed per lot and converted with SBI TT rate (prior-month-end).
• Schedule FA/AL completed.
• Shares you still hold in broker = closing balance you disclosed.

Once you get “RSU = gross, RSU Ded = offset from sell-to-cover, Income Tax = final TDS”, the whole thing becomes fill-in-the-blanks.