Short answer: with time-based vesting, your RSUs convert to shares just because enough time has passed. With performance-based vesting, time alone isn't enough. A business or stock-price target has to be hit too, and if it isn't, the shares don't vest at all. If your offer letter mentions revenue targets, a stock price hurdle, or 'performance RSUs' alongside your regular grant, you're looking at the second kind, and it changes how reliable that part of your comp actually is.
This matters most if you're evaluating an offer at a pre-IPO company, or you're in a senior or executive role where part of your grant is structured this way. Here's what these triggers usually look like, where you'll run into them, and what changes (and doesn't change) once the shares actually vest.
Time-based vesting: the default
Most RSU grants at large tech companies vest purely on a clock. Typically this is a four-year schedule with a one-year cliff (25% at the one-year mark, then the rest monthly or quarterly), though the exact structure varies by employer. As long as you stay employed through each vesting date, that tranche converts into shares. Nothing about company performance or the stock price affects whether the shares vest, only whether you're still there.
Performance-based vesting: an extra condition
Performance-based RSUs (sometimes called PSUs, performance stock units) add a second gate on top of, or instead of, the time requirement. The shares only vest if a defined performance condition is met by a certain date. If it isn't met, that tranche is typically forfeited, whether or not you're still employed.
Common performance triggers include:
- Revenue or ARR targets. The company (or your business unit) has to hit a defined revenue or annual recurring revenue number by a certain date.
- Stock price hurdles. For public or soon-to-be-public companies, the stock has to close above a set price for a sustained period.
- Profitability or EBITDA milestones. The company has to reach a defined profitability threshold.
- Specific project or business milestones. A named event, such as completing a product launch, hitting a regulatory approval, or, at a pre-IPO company, completing an IPO or acquisition.
Where performance-based vesting shows up
Two situations come up most often.
Pre-IPO and startup companies. Before a company goes public, a common form of performance condition is tying vesting to a liquidity event itself, an IPO or acquisition, sometimes combined with a time-based schedule (a 'double-trigger' structure, where both time and the liquidity event have to happen). This is distinct from a plain time-based grant at a company that's already public, where the clock alone determines vesting.
Senior and executive roles. At public companies, performance-based awards are now more common than plain time-based grants or stock options for senior executives, largely because institutional investors and proxy advisory firms prefer executive pay to be tied to measurable results rather than guaranteed by the calendar.
Commonly used metrics at this level include total shareholder return (often measured against peers or an index), revenue, earnings per share, and return on capital, and a single grant may use more than one metric at once, with different portions of the award tied to each .
What happens before your performance RSUs vest
Whether your RSUs are time-based or performance-based, you don't own the underlying shares until they vest. At the grant stage, your employer has only promised to award you shares in the future, and the grant itself is not a taxable event, you don't own the shares yet and don't need to report anything in your tax return simply because RSUs were granted.
Vesting is what converts the RSUs into shares that legally become yours. For a performance-based grant, that conversion is conditional on the performance target being met, not just on time passing.
If you leave your employer before your RSUs vest, unvested RSUs are typically forfeited, and because the shares never became yours, you don't owe any tax on forfeited, unvested RSUs.
The same underlying logic (no vesting means no ownership means no tax) is what makes a missed performance target low-risk from a tax standpoint: if the target isn't hit and the tranche is forfeited, there's nothing to report and nothing you've paid tax on.
The risk with performance-based RSUs isn't a tax bill on shares you never receive, it's that the comp you were counting on simply doesn't materialize.
For more on how vesting schedules work generally, see our post onyour vesting schedule, decoded.
Once performance RSUs vest, the tax treatment is identical to time-based RSUs
This is the part that's easy to miss: a performance condition changes whether and when your RSUs vest. It does not change how they're taxed once they do.
From the moment a performance-based tranche clears its target and converts into shares, it is taxed exactly the same way as a plain time-based tranche vesting on the same day.
At vesting (the first taxable event):
- The fair market value (FMV) of the vested shares on the vesting date is treated as a perquisite, which is added to your salary income and taxed at your applicable income tax slab rate, the same as regular salary.
- You owe this tax in the year of vesting whether you sell the shares or keep them, simply holding vested shares doesn't create any additional liability beyond the vesting-date tax.
- Employers usually deduct TDS on this value underSection 192 of the Income-tax Act, most commonly through sell-to-cover (selling enough shares to cover the estimated tax) or by deducting it from your salary directly.
- Withholding at vesting is only an estimate. Your actual liability depends on your total income and slab, so you may owe more or get a refund when you file.
At sale (the second taxable event):
- Your cost basis (cost of acquisition) for the shares is the FMV on the vesting date, the same value that was already taxed as salary, before any withholding was applied. Shares withheld to cover taxes don't reduce this cost basis.
- Any change in price after vesting is capital gain or loss, not salary income, calculated as sale value minus cost basis.
- The holding period for foreign company RSU shares runs from the vesting date to the sale date. Shares held up to 24 months from the vest date are short-term capital gains, taxed at your slab rate. Shares held more than 24 months from the vest date are long-term capital gains, taxed at 12.5% without indexation.
- Each vesting tranche (whether it vested on time or on hitting a performance target) is a separate lot with its own vesting-date FMV and its own holding-period clock, so different tranches can't be combined into a single capital gains calculation.
Example. Suppose you're an engineering director with a mixed grant: 100 shares vesting on a standard time-based schedule, and a separate 100-share tranche that only vests if your business unit hits its ARR target, which it does, on the same date as the time-based tranche.
On that date, both tranches vest simultaneously. Both are valued at that day's FMV, both amounts are added to your salary income and taxed at your slab rate the same way, and both get the same cost basis for a future sale. The fact that one tranche required hitting a target and the other just required staying employed makes no difference to the tax bill on vesting day.
| | | | | :-: | :-: | :-: | | | \\Time-based tranche\\ | \\Performance tranche\\ | | Vesting condition | Time elapsed | ARR target met | | Value at vesting | Taxed as salary at slab rate | Taxed as salary at slab rate | | TDS | Deducted under Section 192 | Deducted under Section 192 | | Cost basis for later sale | FMV on vesting date | FMV on vesting date | | LTCG clock starts | Vesting date | Vesting date | | \\Total tax treatment\\ | \\Identical\\ | \\Identical\\ |
The result: the performance condition only affects whether and when the tranche vests. Once it does, both tranches sit in the same tax bucket.
For the full mechanics of both taxable events, including a worked calculation with exchange rates, seeRSU taxation explained: from grant and vesting to sale andhow to calculate RSU taxes: a step-by-step guide.
Questions to ask before accepting a grant with performance conditions
If an offer includes performance-based RSUs, get clear, written answers to these before you count the grant as real income for financial planning:
1. What exactly is the metric, and who measures it? Revenue, ARR, EBITDA, stock price, or a named milestone, and is it company-wide or tied to your specific team's results (which you may not control)? 2. What's the actual target number and measurement date or window? A vague 'strong performance' clause is very different from a specific number and deadline. 3. What happens if the target is partially met? Some plans vest a reduced number of shares on a sliding scale, others are all-or-nothing. 4. What happens if the target is missed entirely? Is the tranche simply forfeited, or does it roll forward to a later measurement date? 5. Is this tranche in addition to a time-based schedule, or replacing part of it? A grant that swaps guaranteed time-based shares for conditional performance shares is a real reduction in the reliability of your offer, even if the headline share count looks the same. 6. Does this tranche also have a lockup after it vests? Performance vesting and post-vesting lockups are separate restrictions. SeeRSU lockup periods explained for how those work.
