You checked your vesting schedule. It said 100 shares would vest today. You log into your brokerage account and see 65. Is something wrong?
No. This is almost certainly "sell to cover," the standard mechanism most employers use to collect the tax due on your RSUs at the moment they vest. Nothing was stolen or miscalculated in the way you might fear. Your employer sold a portion of your newly vested shares, on your behalf, to pay the tax that becomes due the instant those shares become yours. What you see land in your account is the shares minus the ones sold to fund that tax.
Here's what actually happens, why the number of shares withheld can look large, and the small extra tax event that the sell-to-cover trade itself creates.
What "sell to cover" actually means
When your RSUs vest, you become the legal owner of the shares, and the fair market value (FMV) of those shares on the vesting date is treated as a perquisite that forms part of your salary income. Because it's salary, tax is due immediately, not when you eventually sell.
Since your employer must withhold tax on your behalf at vesting, and most employers do this automatically rather than asking you to pay separately, they need a way to actually collect that cash. Sell to cover is the most common way employers do this: enough of your newly vested shares are automatically sold to cover the estimated tax, and you're credited with the remaining shares.
Sell to cover isn't the only method. Some employers instead deduct the equivalent tax amount directly from your regular salary or payroll, without touching your share count at all. If your employer does that, all 100 shares would land, but your next payslip would show a larger-than-usual deduction. Either way, the tax gets paid; sell to cover just pays it out of the shares themselves.
Why the withholding happens under Section 192
Employers deduct this tax as Tax Deducted at Source (TDS) underSection 192 of the Income-tax Act when RSUs vest, either by selling a portion of the shares (sell to cover) or by deducting it from salary.
Importantly, all of your vested shares, including the ones sold to cover taxes under a sell-to-cover arrangement, are treated as salary income at vesting. In other words, the shares that get sold aren't excluded from your taxable perquisite. Your full 100 shares were taxed as salary; 35 of them just happened to be liquidated immediately to fund that tax bill.
How many shares actually get sold
Example. Suppose you're an employee whose RSU lot vested on 1 April 2025: 100 shares, with an FMV of $500 per share and an SBI TT buying rate of ₹85.60 on the vesting date. That gives a total salary income (and cost of acquisition) of ₹42,80,000 for this lot, or ₹42,800 per share.
Assume this income pushes you into the 30% tax slab. On the worked figures used elsewhere in Paasa's RSU tax guide, that produces:
| | | | :-: | :-: | | \\Item\\ | \\Value\\ | | Income tax at 30% slab | ₹12,84,000 | | Surcharge (10%) | ₹1,28,400 | | Health & education cess (4%) | ₹56,496 | | \\Total TDS due under Section 192\\ | \\₹14,68,896\\ |
At ₹42,800 per share, your employer needs to raise ₹14,68,896, which works out to about 34.3 shares. Shares can't be sold in fractions, so in practice the broker sells the next whole share, 35 shares, raising ₹14,98,000, about ₹29,104 more than the exact tax bill. That extra amount isn't lost. Withholding at vesting is only an estimate; your actual liability depends on your total income for the year, so you may owe more or be entitled to a refund once you file your return. The excess withheld this way simply shows up as additional TDS credit that gets reconciled at filing time.
The result: 65 of your 100 vested shares land in your brokerage account. The other 35 were sold on vest day to fund the Section 192 withholding.
The number of shares withheld will vary lot to lot, because it depends on your applicable slab, surcharge, and cess at the time, not a fixed percentage.
The sell-to-cover trade creates its own small capital gains event
This is the part that's easy to miss. Selling shares to cover tax doesn't reduce your cost of acquisition. Your cost basis for every vested share, including the 35 that were sold, is fixed at the FMV on the vesting date, before any withholding is applied. This is also the mechanism behindSection 49(2AA): the cost of acquisition for RSU/ESOP shares already taxed as a perquisite under Section 17(2)(vi) is fixed as the FMV that was used for that perquisite calculation.
But those 35 shares weren't just withheld and cancelled. They were sold on the open market, which is itself a disposal of shares. And any sale of RSU shares is a separate taxable event from vesting: capital gain (or loss) equals the sale price minus the cost basis. If the sell-to-cover trade executes at a price slightly different from the FMV that was used to value the perquisite (which can happen simply because of the gap between the moment FMV is fixed for tax purposes and the moment the broker's trade actually executes), those 35 shares generate a small, separate short-term capital gain or loss on top of the salary income already taxed at vesting. Since these shares are sold essentially the same day they vest, the holding period is effectively zero, which means any such gain or loss falls under short-term capital gains and is taxed at your income slab rate.
This is also why sell-to-cover shares aren't invisible to your foreign asset reporting: shares sold for tax withholding should still be reported in Schedule FA, because you briefly owned them before they were sold to meet your tax obligation.
If this sounds familiar, it's because the same mechanism shows up in ESPPs: some employers fund ESPP TDS liability through an equivalent sell-to-cover trade at purchase, selling a portion of the newly purchased shares to raise the tax due.
What to reconcile at year end
Because sell to cover splits one vesting event into a tax withholding and a small trade, you'll want to check three documents against each other when you file:
- Form 16. Shows the salary income and tax deducted at the time your RSUs vested, and the TDS deducted on vested RSUs (whether collected via sell to cover or salary deduction) is reflected here and can be claimed while filing your return. Form 16 alone, however, does not contain everything needed to calculate capital gains on the sale.
- Your broker's vesting and sale statement. For salary reporting, you need Form 16, vesting statements, and payslips; for the sell-to-cover trade itself, you'll also want brokerage statements and sale confirmations to compute any resulting capital gain or loss.
- Form 26AS and the Annual Information Statement (AIS). Form 26AS shows the taxes deducted or collected on your behalf, and yourAIS should be checked to confirm your reported income matches what's on file with the Income Tax Department.
Reconciling these three sources catches the two most common sell-to-cover mistakes: forgetting that the withheld shares still need to be reported as a (usually tiny) capital gains transaction, and assuming the TDS shown in Form 16 automatically settles your full tax liability for the year, when it's only an estimate made at vesting.
