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Income Tax

RSU & ESOP Taxation in India: Tax Year 2026-27 Guide

By Srikanth Nittala, CMA (ICWA) · Updated 19 Oct 2026 · 4 min read

✓ For Tax Year 2026-27 (Income-tax Act, 2025) · Reviewed 19 Oct 2026

The short answer: RSUs are taxed twice. First as salary when they vest, on the full market value. Then as capital gains when you sell, but only on the rise after vesting. Most mistakes come from mixing up these two steps.

1. RSU, ESOP and ESPP: what's taxed when

What you get Taxed as salary when Taxable salary amount
RSU Shares, free, on a vesting schedule Shares vest Market value on vesting date
ESOP An option to buy shares at a fixed price You exercise Market value on exercise date − price you pay
ESPP Shares bought at a discount Shares are bought Market value on purchase date − price you pay

After that, all three work the same way: when you sell, the gain over the value already taxed as salary is a capital gain.

2. Tax at vesting: it's salary

  • The value of vested shares is a perquisite, added to your salary in the year they vest. It's taxed at your slab rate, under whichever regime you choose.
  • Your employer deducts TDS on it and shows it in Form 16. Many companies sell a few shares on vesting ("sell to cover") to fund that TDS.
  • You pay this tax even if you never sell. That's the most common surprise.
  • Section: a perquisite under section 17(1)(d) of the Income-tax Act, 2025 (section 17(2)(vi) of the 1961 Act).
  • The market value (FMV) is worked out under the Income-tax Rules, and your employer computes it. Check the per-share value and the exchange rate in your payslip or Form 16.

Startup employees: if your employer is an eligible DPIIT-recognised startup, tax on the perquisite can be deferred, typically until the earliest of 48 months after the end of the tax year, your sale of the shares, or leaving the company.

3. Tax when you sell: Indian shares vs US shares

Your cost is the market value on the vesting (or exercise) date, the amount already taxed as salary. The holding period also starts from that date.

Indian listed shares (STT paid) Foreign shares, e.g. US-listed RSUs
Long-term after More than 12 months More than 24 months
Short-term gain 20% (Sec 196, old 111A) Your slab rate
Long-term gain 12.5% above ₹1.25 lakh a year (Sec 198, old 112A) 12.5%, no ₹1.25 lakh exemption, no indexation (Sec 197, old 112)

Plus 4% cess, and surcharge if your income is high. Foreign shares aren't listed on an Indian exchange, so they follow the unlisted-share rules: a 24-month holding period and no ₹1.25 lakh exemption.

Worked example (US RSUs)

  • 100 RSUs vest when the share is $150 and $1 = ₹84. Salary perquisite = 100 × 150 × 84 = ₹12,60,000, taxed through your salary.
  • You sell all 100 shares 30 months later at $200, when $1 = ₹86. Sale value = ₹17,20,000.
  • Long-term capital gain = 17,20,000 − 12,60,000 = ₹4,60,000.
  • Tax at 12.5% = ₹57,500, plus 4% cess = ₹59,800.

Rupee values must use the exchange rates the Income-tax Rules prescribe, usually the SBI telegraphic transfer buying rate.

4. Reporting foreign shares in your ITR

  • Schedule FA (foreign assets): list every foreign share you held at any time in the calendar year, even if you didn't sell. This includes vested RSUs and ESPP shares sitting in your E*TRADE, Fidelity or Morgan Stanley account.
  • Penalty risk: not disclosing foreign assets can attract a ₹10 lakh penalty under the Black Money Act. Since 1 October 2024 there's relief for foreign assets other than property worth up to ₹20 lakh in total, but disclosure is still required.
  • Dividends: US companies usually withhold 25% tax on dividends (with a W-8BEN form). Report the dividend in India and claim credit for the US tax by filing Form 67 before you file your ITR.
  • Form: with foreign assets or foreign income you can't use ITR-1. Use ITR-2 (or ITR-3 if you have business income).

5. Mistakes that lead to notices

  1. Skipping Schedule FA because "I didn't sell anything".
  2. Using the grant price as cost. Your cost is the vesting-date value; using the grant price makes you pay tax twice on the same amount.
  3. Applying the 12-month rule to US shares. For foreign shares it's 24 months.
  4. Claiming the ₹1.25 lakh exemption on US shares. It only applies to STT-paid Indian equity.
  5. Not filing Form 67, and so losing credit for tax already withheld in the US.
  6. Forgetting small dividends or interest in the foreign brokerage account.

Quick checklist before you file

  • ☐ Form 16 shows the RSU/ESOP perquisite and TDS
  • ☐ Vesting-date value and exchange rate noted for every lot
  • ☐ Sales classified as short or long term (12 or 24 months)
  • ☐ Schedule FA completed for the calendar year
  • ☐ Form 67 filed for any foreign tax credit
  • ☐ Filing ITR-2 or ITR-3, not ITR-1
Try it yourself: Estimate your salary tax, including RSUs

General education, not personal tax or investment advice. Laws and rates change, so verify against current law before acting. Disclaimer