My client is paid partly in restricted stock units of a US parent. Everyone tells me RSUs are taxed on vesting rather than on exercise. Is there authority for that in Indian law?
None has been found, and this entry — which is about stage one, the perquisite charge — says so expressly rather than reasoning by analogy from options. What the Act does say is this. Stage one, s.17(2)(vi), charges "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee" — words wide enough on their face to catch shares of a foreign parent delivered to an Indian employee without payment. But the VALUATION machinery is written around an option: Explanation (c) values the security "on the date on which the option is exercised by the assessee", Explanation (e) defines "option" as "a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price", and Rule 3(8)(i) and Rule 3(9) both fix the fair market value "on the date on which the option is exercised by the employee". Stage two is clearer: s.49(2AA) makes the cost the value taken into account at stage one, and s.2(42A) Explanation 1(i)(hb) runs the holding period from the date of allotment or transfer.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Section 17(2)(vi), section 49(2AA) and Explanation 1(i)(hb) to section 2(42A) of the Income-tax Act, 1961, as amended up to 2025, with rules 3(8) and 3(9) of the Income-tax Rules, 1962. It bears on section 17(2)(vi), section Rule 3(8), section Rule 3(9), section 49(2AA), section 2(42A), section 192 of the Income Tax Act 1961, in Salary & Perquisites, Capital Gains, How Tax Law Is Read and TDS Defaults matters.
A restricted stock unit is not an option. Typically nothing is applied for and nothing is paid at a predetermined price: units convert into shares when time-based or performance conditions are met, and the shares are then delivered. That is why the received wisdom is that the charge falls at vesting. The difficulty is that the statutory words which fix the date of valuation are tied to "the date on which the option is exercised", and none of the material examined tells a practitioner how that phrase is to be applied where there is no option and no exercise. Three things can nevertheless be said with confidence. First, the CHARGE itself does not depend on there being an option: the charging words in s.17(2)(vi) speak of a specified security "allotted or transferred ... free of cost or at concessional rate", and "specified security" takes its meaning from s.2(h) of the Securities Contracts (Regulation) Act, 1956, extended where an employees' stock option has been granted under a plan or scheme. Second, the HOLDING PERIOD for the eventual capital gain runs from the date of allotment or transfer under s.2(42A) Explanation 1(i)(hb), whatever the answer on the perquisite date. Third, the COST at stage two is whatever value was in fact taken into account at stage one, under s.49(2AA), so getting stage one right matters at both ends. Until authority exists, the safe course is to date and document the delivery of the shares, to record the market price on that date, and to keep the employer's working, so that whichever date is ultimately held to govern, the figures can be produced.
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The charging words of s.17(2)(vi) are: "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee." Explanation (a) defines "specified security" as "the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme". Explanation (c) provides that "the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares". Explanation (e) provides that "'option' means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price". Rule 3(8)(i) fixes the fair market value of an equity share "on the date on which the option is exercised by the employee", and Rule 3(9) does the same for a specified security that is not an equity share. Section 49(2AA) fixes the cost of acquisition on sale as "the fair market value which has been taken into account for the purposes of the said sub-clause", and Explanation 1(i)(hb) to s.2(42A) provides that for a specified security or sweat equity share allotted or transferred by the employer free of cost or at concessional rate "the period shall be reckoned from the date of allotment or transfer".
Not a judgment. The statutory position is that s.17(2)(vi) charges the value of a specified security allotted or transferred free of cost or at concessional rate, without requiring that an option have been granted, while the valuation machinery in Explanation (c) and in Rule 3(8) and Rule 3(9) is expressed by reference to the date on which an option is exercised. On the searches recorded in the editor note, no decision was found determining how that machinery applies to a restricted stock unit, and none was found holding that the charging point for a restricted stock unit is vesting. The holding period for the eventual capital gain runs from the date of allotment or transfer under Explanation 1(i)(hb) to s.2(42A), and the cost of acquisition on sale is the value taken into account at stage one under s.49(2AA).
Not a judgment; no judicial reasoning is stated. The three decisions examined in which restricted stock units feature — NXP India Pvt Ltd v. DCIT (ITAT Bangalore, 27 April 2020), ELCA Cosmetics Pvt Ltd v. DCIT (ITAT Delhi, 14 February 2025) and Goldman Sachs (India) Securities Pvt Ltd v. ACIT (ITAT Mumbai, 3 June 2025) — are all concerned with the employer's deduction for the cost of the plan. ELCA Cosmetics records at its paragraph 6.1 that employee-wise details of the units and a stock exchange quotation "on date of allotment" were produced, but the Tribunal made no finding about the employee's charging date. NXP India engaged the vesting question only through the Dispute Resolution Panel's argument that the employee's charge follows the employer's deduction, and the Tribunal's treatment of that argument is discussed in the separate entry on that order.
"option" means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;
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Handle my notice → Ask a CA on WhatsAppNone has been found, and this entry — which is about stage one, the perquisite charge — says so expressly rather than reasoning by analogy from options. What the Act does say is this. Stage one, s.17(2)(vi), charges "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee" — words wide enough on their face to catch shares of a foreign parent delivered to an Indian employee without payment. But the VALUATION machinery is written around an option: Explanation (c) values the security "on the date on which the option is exercised by the assessee", Explanation (e) defines "option" as "a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price", and Rule 3(8)(i) and Rule 3(9) both fix the fair market value "on the date on which the option is exercised by the employee". Stage two is clearer: s.49(2AA) makes the cost the value taken into account at stage one, and s.2(42A) Explanation 1(i)(hb) runs the holding period from the date of allotment or transfer. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section 17(2)(vi), section Rule 3(8), section Rule 3(9), section 49(2AA), section 2(42A), section 192 of the Income Tax Act 1961. It is reported as Section 17(2)(vi), section 49(2AA) and Explanation 1(i)(hb) to section 2(42A) of the Income-tax Act, 1961, as amended up to 2025, with rules 3(8) and 3(9) of the Income-tax Rules, 1962. A restricted stock unit is not an option. Typically nothing is applied for and nothing is paid at a predetermined price: units convert into shares when time-based or performance conditions are met, and the shares are then delivered. That is why the received wisdom is that the charge falls at vesting. The difficulty is that the statutory words which fix the date of valuation are tied to "the date on which the option is exercised", and none of the material examined tells a practitioner how that phrase is to be applied where there is no option and no exercise. Three things can nevertheless be said with confidence. First, the CHARGE itself does not depend on there being an option: the charging words in s.17(2)(vi) speak of a specified security "allotted or transferred ... free of cost or at concessional rate", and "specified security" takes its meaning from s.2(h) of the Securities Contracts (Regulation) Act, 1956, extended where an employees' stock option has been granted under a plan or scheme. Second, the HOLDING PERIOD for the eventual capital gain runs from the date of allotment or transfer under s.2(42A) Explanation 1(i)(hb), whatever the answer on the perquisite date. Third, the COST at stage two is whatever value was in fact taken into account at stage one, under s.49(2AA), so getting stage one right matters at both ends. Until authority exists, the safe course is to date and document the delivery of the shares, to record the market price on that date, and to keep the employer's working, so that whichever date is ultimately held to govern, the figures can be produced. If it applies to you, the first step is this: Read the plan document before anything else and establish whether the employee has to APPLY for the shares at a predetermined price. If he does, you are on an option and the exercise-date machinery applies in terms; if he does not, note the gap and do not paper over it.
The charging words of s.17(2)(vi) are: "the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee." Explanation (a) defines "specified security" as "the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and, where employees' stock option has been granted under any plan or scheme therefor, includes the securities offered under such plan or scheme". Explanation (c) provides that "the value of any specified security or sweat equity shares shall be the fair market value of the specified security or sweat equity shares, as the case may be, on the date on which the option is exercised by the assessee as reduced by the amount actually paid by, or recovered from, the assessee in respect of such security or shares". Explanation (e) provides that "'option' means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price". Rule 3(8)(i) fixes the fair market value of an equity share "on the date on which the option is exercised by the employee", and Rule 3(9) does the same for a specified security that is not an equity share. Section 49(2AA) fixes the cost of acquisition on sale as "the fair market value which has been taken into account for the purposes of the said sub-clause", and Explanation 1(i)(hb) to s.2(42A) provides that for a specified security or sweat equity share allotted or transferred by the employer free of cost or at concessional rate "the period shall be reckoned from the date of allotment or transfer". It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that s.17(2)(vi) charges the value of a specified security allotted or transferred free of cost or at concessional rate, without requiring that an option have been granted, while the valuation machinery in Explanation (c) and in Rule 3(8) and Rule 3(9) is expressed by reference to the date on which an option is exercised. On the searches recorded in the editor note, no decision was found determining how that machinery applies to a restricted stock unit, and none was found holding that the charging point for a restricted stock unit is vesting. The holding period for the eventual capital gain runs from the date of allotment or transfer under Explanation 1(i)(hb) to s.2(42A), and the cost of acquisition on sale is the value taken into account at stage one under s.49(2AA).
Not a judgment; no judicial reasoning is stated. The three decisions examined in which restricted stock units feature — NXP India Pvt Ltd v. DCIT (ITAT Bangalore, 27 April 2020), ELCA Cosmetics Pvt Ltd v. DCIT (ITAT Delhi, 14 February 2025) and Goldman Sachs (India) Securities Pvt Ltd v. ACIT (ITAT Mumbai, 3 June 2025) — are all concerned with the employer's deduction for the cost of the plan. ELCA Cosmetics records at its paragraph 6.1 that employee-wise details of the units and a stock exchange quotation "on date of allotment" were produced, but the Tribunal made no finding about the employee's charging date. NXP India engaged the vesting question only through the Dispute Resolution Panel's argument that the employee's charge follows the employer's deduction, and the Tribunal's treatment of that argument is discussed in the separate entry on that order. In the words reproduced by the source cited on this page: ""option" means a right but not an obligation granted to an employee to apply for the specified security or sweat equity shares at a predetermined price;"
It was decided by the CBDT Circulars & Instructions and is reported as Section 17(2)(vi), section 49(2AA) and Explanation 1(i)(hb) to section 2(42A) of the Income-tax Act, 1961, as amended up to 2025, with rules 3(8) and 3(9) of the Income-tax Rules, 1962. Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section 17(2)(vi), section Rule 3(8), section Rule 3(9), section 49(2AA), section 2(42A), section 192, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that s.17(2)(vi) charges the value of a specified security allotted or transferred free of cost or at concessional rate, without requiring that an option have been granted, while the valuation machinery in Explanation (c) and in Rule 3(8) and Rule 3(9) is expressed by reference to the date on which an option is exercised. On the searches recorded in the editor note, no decision was found determining how that machinery applies to a restricted stock unit, and none was found holding that the charging point for a restricted stock unit is vesting. The holding period for the eventual capital gain runs from the date of allotment or transfer under Explanation 1(i)(hb) to s.2(42A), and the cost of acquisition on sale is the value taken into account at stage one under s.49(2AA). It arises in Salary & Perquisites, Capital Gains, How Tax Law Is Read and TDS Defaults matters, on section 17(2)(vi), section Rule 3(8), section Rule 3(9), section 49(2AA), section 2(42A), section 192 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Record, for every tranche, the grant date, the vesting date, the date the shares were actually delivered or credited to the demat account, and the market quotation on each of those dates. Whichever date is held to govern, you will then have the figure. Take the perquisite figure the employer has used in Form 12BA and ask, in writing, which date and which sub-rule it was computed on. That answer is what you will have to defend. Compute the holding period from the date of allotment or transfer under s.2(42A) Explanation 1(i)(hb); that rule is express and does not depend on resolving the perquisite date. At sale, take the cost from the value actually taken into account under s.17(2)(vi) as s.49(2AA) requires — not the nil amount paid for the units. Do not cite the employer-side cross-charge decisions for the employee's charging point. They decide deductibility of the cost in the company's hands and nothing else.
Searched for later treatment; none was found. That is not the same as a source affirming it. Nothing has been found displacing the statutory machinery this entry sets out, and nothing that fills the gap the entry expressly records. Section 17(2)(vi) was read on the current published edition: it charges 'the value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee', with its Explanation intact and no amendment footnote on the clause. Section 49(2AA) was read on the current edition and carries no footnote either. THE RULE 3(8) AND 3(9) LIMB COULD NOT BE READ IN AN OFFICIAL EDITION and comes from a published text of the Rules; a companion entry records that limitation, and the rule should be checked before its words are quoted in a proceeding. THE NEGATIVE IN THIS ENTRY REMAINS A SEARCH RESULT AND NOT A PROPOSITION OF LAW. Ten Tribunal orders in which restricted stock units feature have been examined and none decides the point; that is set out in the editor note. It does not follow that no decision exists, and a practitioner who needs the answer should search again before advising. What can be relied on is the statutory text: the charge in s.17(2)(vi) does not require that an option have been granted, the valuation machinery in Explanation (c) and in Rule 3(8) and 3(9) is written by reference to the date on which an option is exercised, and nothing reconciles the two for an instrument under which nothing is applied for and nothing is paid. This states the law under the 1961 Act, which governs up to AY 2026-27 and the disputes arising from those years. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
THIS ENTRY CONTAINS A STATED NEGATIVE AND THE READER IS ENTITLED TO KNOW EXACTLY HOW NARROW IT IS. The negative is this: no decision of any court or Tribunal has been found fixing the point in time at which a restricted stock unit becomes chargeable as a perquisite in the employee's hands, and in particular none holding that the charging point is vesting rather than exercise. That is not a claim that no such decision exists. TEN ORDERS IN WHICH RESTRICTED STOCK UNITS FEATURE HAVE BEEN EXAMINED, and the negative rests on all ten. Three are employer-side cases about the deductibility of the cost of the plan and decide nothing about the employee's charge: NXP India Pvt Ltd v DCIT (ITAT Bangalore, 27 April 2020), ELCA Cosmetics Pvt Ltd v DCIT (ITAT Delhi, 14 February 2025) and Goldman Sachs (India) Securities Pvt Ltd v ACIT (ITAT Mumbai, 3 June 2025). Two more are employer-side deduction appeals under s.37 which describe a CASH-SETTLED scheme, under which the employee receives cash on completion of the vesting period rather than shares, so no specified security is allotted at all: M/s Northern Operating Services v JCIT (ITAT Bangalore, 1 May 2023 and 31 January 2023). Three contain no discussion of the employee's charging point at all: Hewlett Packard (India) Software Operation Pvt. Ltd. v DCIT (ITAT Bangalore, 18 January 2023), Juniper Networks India Pvt. Ltd. v PCIT (ITAT Mumbai, 9 May 2025) and Goldman Sachs (India) Securities Pvt. Ltd. v NFAC (ITAT Mumbai, 9 December 2024). The last two touch it only in passing, and in each case by reference to EXERCISE and not to vesting: Aricent Technologies (Holdings) Ltd. v Addl. CIT (ITAT Delhi, 23 December 2019), by way of an observation that the perquisite arises under s.17(2)(vi) on exercise and actual allotment, and AstraZeneca Pharma India Ltd. v DCIT (ITAT Bangalore, 25 June 2024), by recording the assessee's practice of taking the fair market value on the date of exercising the unit as the perquisite. A search on the statutory words 'restricted stock units' with 'specified security' returned nothing at all. NO CIRCULAR, NOTIFICATION OR RULE DEALING WITH RESTRICTED STOCK UNITS BY NAME HAS BEEN FOUND. The statutory texts set out here were transcribed as continuous runs from the current editions of s.17 and s.49, the edition of s.2 as amended up to 2024, and a published text of Rule 3, and each is separately sourced in the corresponding entry in this library. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that s.17(2)(vi) charges the value of a specified security allotted or transferred free of cost or at concessional rate, without requiring that an option have been granted, while the valuation machinery in Explanation (c) and in Rule 3(8) and Rule 3(9) is expressed by reference to the date on which an option is exercised. On the searches recorded in the editor note, no decision was found determining how that machinery applies to a restricted stock unit, and none was found holding that the charging point for a restricted stock unit is vesting. The holding period for the eventual capital gain runs from the date of allotment or transfer under Explanation 1(i)(hb) to s.2(42A), and the cost of acquisition on sale is the value taken into account at stage one under s.49(2AA).
TaxSphere, “Statutory position — restricted stock units: what s.17(2)(vi), Rule 3(8) and s.2(42A) actually say about them, and the express statement that no authority fixing the charging point at vesting was found”, https://taxnotice.vittsphere.com/caselaw/case/statutory-position-restricted-stock-units-what-the-esop-machinery-says-and-what-it-does-not/ (validity last checked 2026-09-09)
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The Assessing Officer says my ESOP perquisite should have been computed on a higher share value than my employer used. What is the prescribed method for fixing the fair market value on the date I exercised?
My employer put a large ESOP figure in my Form 16 in the year I exercised my options, even though I have not sold a single share. On what provision is that being taxed, and how is the amount worked out?
I paid tax on my ESOP perquisite when I exercised. Now I have sold the shares. What is my cost of acquisition, and from what date does my holding period run?
The TDS officer says my employer under-deducted on my ESOP perquisite because the company's shares actually changed hands at Rs 850 while the merchant banker valued them at Rs 194. Which figure fixes the perquisite?
