RSU stands for restricted stock unit. If your offer letter mentions RSUs and nobody has explained what that actually means, here is the short answer: an RSU is a promise from your employer to give you company shares in the future, once you meet certain conditions.
It is not a share you own today, it is not cash, and it is not guaranteed until it vests. This post walks through what a grant represents, what happens the day it vests, why the vest-day price matters for years afterward, and why you should not treat unvested RSUs as part of your net worth.
Table of contents
- What an RSU grant actually is
- What happens on vest day
- Why the vest-day FMV becomes your cost basis
- Why unvested RSUs are not your net worth
What an RSU grant actually is
RSUs are a form of equity compensation that employers grant to employees. Instead of handing you shares immediately, your employer promises to award you a certain number of shares in the future, once you meet conditions that are usually tied to continued employment over a specified period.
At the grant stage, you do not own the shares, and they have not yet been transferred to you. The grant itself is not a taxable event, and you don't need to report anything in your tax return simply because RSUs were granted to you. Interestingly, the price the company used when it made the grant (the "grant price") has no bearing on what you eventually pay in tax. What matters is the value of the shares on the day they vest, not the day they were promised.
Most employees don't receive their entire grant in one shot. Instead, RSUs vest over several months or years, on a schedule your employer sets. Note: the mechanics of that schedule (cliffs, quarterly tranches, refresher grants layered on top) are covered in a separate deep dive: Your vesting schedule, decoded. This post focuses on what happens once a tranche actually vests.
What happens on vest day
Vesting is when your RSUs convert into shares and become yours. You become the legal owner of the shares only at this point, not at grant. Once they vest, they become regular company shares sitting in your brokerage account, no different from any other stock you hold.
Two things happen simultaneously on vest day: shares get delivered to you, and a tax bill is triggered.
Share delivery. The number of shares that vest on that date land in whichever brokerage or equity plan account your employer uses to administer the grant.
Perquisite tax under Section 17(2)(vi). Vesting is the first taxable event for RSUs. The fair market value (FMV) of the shares on the vesting date is treated as employment income and taxed like salary. Specifically, the discount or value received is treated as a perquisite under Section 17(2) of the Income Tax Act and taxed as salary income in that financial year (the same provision that governs ESPP purchase discounts applies to the value delivered at RSU vesting). The formula is straightforward:
Salary Income = Number of Vested Shares × FMV on Vesting Date × Exchange Rate
The exchange rate used is generally the SBI TT Buying Rate (TTBR) applicable on the vesting date. This is because RSU vesting almost always triggers immediate tax withholding through sell-to-cover, and the tax rules use the withholding date (in practice, the vesting date) as the conversion date whenever withholding applies.
You owe this tax even if you don't sell a single share. Holding vested RSU shares does not create any additional tax liability beyond the vesting-day charge, but you owe tax on vested RSUs whether you sell them or keep them.
Sell-to-cover. Since tax is due the moment your RSUs vest, your employer must withhold tax on your behalf. Employers usually deduct Tax Deducted at Source (TDS) under Section 192 of the Income-tax Act when RSUs vest. The most common way this happens is "sell-to-cover": the employer or broker automatically sells enough of your newly vested shares to cover the estimated tax, and credits you with the rest. Some employers instead withhold shares outright or collect the tax in cash from your regular payroll. Either way, this is why fewer shares land in your account than the number that technically vested. A dedicated post walks through this mechanic in more detail: What is "sell to cover"?
One important caveat: withholding at vesting is only an estimate. Your actual tax depends on your total income and slab for the year, so you may owe more or get a refund when you file.
Example. Suppose you are an employee whose employer vests 100 shares on 1 April 2025, when the stock's FMV is $500 per share and the applicable SBI TTBR is ₹85.60. Assume this pushes your total income into the highest slab, so it is taxed at 30%, plus a 10% surcharge and 4% cess on top.
| Item | Amount |
|---|---|
| Shares vested | 100 |
| FMV per share | $500 |
| SBI TTBR (vest date) | ₹85.60 |
| Taxable salary income (FMV × shares × rate) | ₹42,80,000 |
| Income tax at 30% slab | ₹12,84,000 |
| Surcharge (10%) | ₹1,28,400 |
| Health & Education Cess (4%) | ₹56,496 |
| Total tax on this vesting event | ₹14,68,896 |
The result: roughly ₹14.7 lakh of tax is due on this single vesting event, treated exactly like salary, regardless of whether you sell the shares or keep them.
Why the vest-day FMV becomes your cost basis
This is the part beginners most often get wrong, and it matters for years after the grant is gone.
Once RSUs vest, the FMV on the vesting date becomes the cost of acquisition (cost basis) of the shares. Put differently: your cost basis for RSU shares is the fair market value of the shares on the vesting date, before any tax withholding is applied. This is set at the pre-withholding FMV because the entire value of the vested shares was already treated as salary income at vesting, even if some shares were sold or withheld to pay taxes. Withholding shares for tax does not reduce your cost of acquisition.
This rule has statutory backing. Under Section 49(2AA) of the Income Tax Act, the cost of acquisition for shares already taxed as a perquisite under Section 17(2)(vi) is fixed as the fair market value that was taken into account for that perquisite, the same INR figure already reported in your Form 16.
Why does this matter? Because it means you are never taxed twice on the same value. When you eventually sell, capital gains tax is only paid on the increase in the share price after vesting. The formula is:
Capital Gain = Sale Value − Cost of Acquisition (FMV on the Vesting Date)
If you sell for more than the vesting-date FMV, the difference is a taxable capital gain; if you sell for less, it's a capital loss.
The rate depends on how long you've held the shares after vesting, not after grant. Shares held for 24 months or less from the vest date are short-term capital gains, taxed at your income slab rate; shares held more than 24 months are long-term capital gains, taxed at 12.5% without indexation. If your employer vests you in multiple tranches, note that each vesting creates a separate lot with its own FMV and holding-period clock, and lots from different vesting dates cannot be combined into a single tax calculation. For the full mechanics of how FMV itself gets determined and reported, see Fair market value for RSUs, explained, and for a walkthrough of how these dates interact, see Grant date vs. vest date vs. exercise date.
Why unvested RSUs are not your net worth
It is tempting to look at an offer letter that says "₹80 lakh in RSUs over four years" and mentally add that to your net worth, or count on it when deciding what home loan you can afford. Resist this.
Unvested shares are not an asset you own. They are a promise of future shares, conditional on you continuing to meet your vesting schedule. This is not just a semantic distinction, it has real consequences:
- They can disappear entirely. In most cases, if you leave your employer (or are let go) before your RSUs vest, any unvested RSUs are forfeited. Because the shares never became yours, you don't owe any tax on the forfeited grant either, but you also don't get the shares or their value.
- They aren't legally yours until vest day. You become the legal owner of RSU shares only when they vest, not when they are granted. Until then, there is nothing to sell, borrow against, or transfer.
- Their value can swing wildly by the time they do vest. Because the number of shares in a grant is usually fixed but the stock price isn't, a grant that looked like ₹80 lakh at the offer-letter share price could be worth meaningfully more or less by the time each tranche actually vests.
Treating a multi-year grant as money in hand today, whether for net worth calculations, loan applications, or spending decisions, means counting something you might never receive, at a value that hasn't been fixed yet. A dedicated post walks through this in more depth, including how to think about concentration risk in the shares you do hold once they vest: Your RSU is not your net worth.
