A former employee of a US-listed technology company, who returned to India in 2022, is seeking clarity on the tax implications of selling Restricted Stock Units (RSUs) received during their overseas employment. This scenario highlights a common concern for professionals moving back to India with overseas equity compensation.
Tax Treatment for Resident Indians on Foreign RSUs
For an individual who has been residing in India since 2022 and qualifies as a Resident and Ordinary Resident (ROR), the global income becomes taxable in India. This includes any capital gains realized from the sale of foreign assets like RSUs.
A critical point is that shares listed on foreign exchanges are treated as unlisted securities under Indian tax law because they are not listed on a recognized Indian stock exchange. This classification directly impacts how the gains are taxed.
The tax rate depends on the holding period. Assuming the RSUs were received before the individual's return to India in 2022, the holding period would likely exceed 24 months. Consequently, the profit from the sale would be classified as Long-Term Capital Gains (LTCG).
Long-term capital gains on unlisted securities are taxed at a flat rate of 12.5%, plus applicable surcharge and health and education cess. This is a vital figure for financial planning.
Mandatory Foreign Asset Disclosure for Residents
Once a person attains ROR status, they have a mandatory annual reporting requirement. All foreign assets, including vested RSUs, must be disclosed in Schedule FA of the Indian income tax return for every financial year they are held. Failure to do so can lead to scrutiny and penalties.
Regarding US taxation, if the individual is now considered a non-resident alien in the United States, the capital gains from the sale of these RSUs would generally not be taxable there. This means no foreign tax credit would be available or needed to be claimed in India against the tax paid here.
Navigating FAIU Summons for Non-Resident Indians (NRIs)
A separate query involves an NRI living in the UAE for two decades who received a summons from the Foreign Assets Investigation Unit (FAIU) of the Income Tax Department. The FAIU seeks information about an unreported foreign bank account.
The FAIU is a specialized wing that probes undisclosed foreign income and assets. Such summons often arise when a taxpayer's PAN card status shows 'resident' while the individual has been filing returns as a non-resident, creating a discrepancy in the tax department's records.
For someone residing abroad for 20 years, qualifying as a non-resident for Indian tax purposes, the rules are different. Non-residents are not obligated to disclose foreign assets or foreign-sourced income in Schedule FA of their Indian tax return.
Experts advise that since FAIU communications may not specify the assessment period, the individual should submit a written response. This should clearly explain their non-resident status throughout the entire duration of holding the bank account. If there was any period of residency in India during the account's operation, that timeline must be precisely outlined to clarify the years of non-residency.
These cases underscore the importance of correctly determining residential status and complying with the distinct reporting and tax obligations for residents and non-residents in India, especially concerning foreign holdings.
