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What Are RSUs – Restricted Stock Units?

December 28, 20201948 views0

RSUs or Restricted Stock Units are a type of compensation benefits that employers offer to employees. These benefits are often awarded based on performance and issued through a vesting plan and distribution schedule. Until the vesting period is complete, RSUs have no tangible value. When vested, these units can be sold off at Fair Market Value or FMV. However, the company withholds a portion of these shares to pay income tax, and the rest go to the employee.

The benefit of issuing RSUs is that these are not actual shares to track or record. So, administration costs become minimal for the employer. Leveraging RSUs, companies can defer the issue of shares until the completion of the vesting schedule and thus slow down the dilution process.

Infosys granted RSUs to its top-performing middle-level managers in June 2016. A four-year vesting period was set, and shares were offered at par value. Let’s suppose that an Infosys mid-level manager received 1,000 units. If the employee continues to work with the company and meets performance parameters, she will receive 250 shares in 2017, 2018, 2019, and 2020. Now, if the share trade of Infosys is INR 1,200 next year, INR 1,500 the year after that, and INR 2,000 thereafter, the employee will cash the shares in the market at these prices. As a result, the employee will make a profit of around INR 1.5 lakh to INR 2.5 lakh in each of the next four years. At the same time, Infosys retained this top-performing employee, issued RSUs at no administration cost, and ensured that the shares were not diluted until 2020.

Taxation on RSUs

One can sell only those RSUs that are vested (after the acquisition date). The profit earned is considered as a capital gain and is therefore taxable in India. For RSUs:

Capital Gain = FMV – Price on vesting date