RSUs and ESPP: Equity Compensation Across India and the US
The US half of this is well covered everywhere. The part that decides how much tax you actually pay — how a vesting period that spanned two countries is divided between them, and the date on which that division becomes permanent — is not.
The short answer
For RSUs, vesting is the taxable event — not grant, not sale. The value at vest is ordinary wage income; everything after that is capital gain from a vest-date basis. If you worked in both countries between grant and vest, the income splits between them on a day count — and that split locks on the vesting date.
Three dates, one taxable event
Every equity award has a grant date, a vesting date and a disposal date, and almost every mistake on a return comes from taxing the wrong one. RSUs and ESPP shares are both equity compensation but they behave differently, so it is worth separating them before anything else.
| Award | At grant | Tax arises | What is taxed, and afterwards |
|---|---|---|---|
| RSU | Nothing. A promise of future shares is not property, so there is no taxable event and no section 83(b) election is possible. | Vesting | The full market value of the shares that vest, as ordinary wage income. It appears on your W-2 and your employer normally withholds by holding back shares.Your basis is that vest-date value. Everything from there is capital gain or loss, short or long term measured from the vest date. |
| ESPP | Nothing at grant, and nothing on purchase either — an employee stock purchase plan is a statutory plan, so the discount is not taxed when you buy. | Sale | Tax is deferred to the disposition. How much is ordinary income and how much is capital gain depends on whether you satisfied the statutory holding periods.Miss the holding periods and part of the gain is recharacterised as ordinary wages. Your employer reports the purchase on Form 3922, which carries the dates and values you need. |
One consequence of that first column deserves stating on its own, because the question is asked constantly: you cannot make a section 83(b) election on an RSU. That election applies to property transferred subject to forfeiture, and at the grant of an RSU no property has been transferred — you hold a promise, with no shares, no votes and no dividends. There is nothing for the election to attach to.
The error that taxes the same money twice
Before any cross-border complexity, deal with the mistake that costs people the most money and has nothing to do with India at all.
When your RSUs vest, the market value of the shares is added to your wages and taxed. That taxed amount becomes your cost basis in the shares. So when you later sell, only the movement since vesting is a capital gain.
Brokers frequently report that basis as zero. For an RSU you paid nothing out of pocket, so a broker reporting only your cash outlay reports nothing. File the form as it arrives and the amount already taxed through your W-2 gets taxed a second time as capital gain. On a large vest that is a five-figure error, and it is invisible unless you check — the return is arithmetically consistent, it is just wrong. Report the correct basis using the adjustment the return provides for, and keep the vesting statements that prove it.
Check this every year rather than once. Whether the basis comes through correctly depends on the broker, the plan administrator and the type of award, and getting it right one year is no guarantee about the next.
Grant to vest: where the income comes from
Now the part this page exists for. Equity compensation is pay for services, and pay for services is sourced to where the services were performed — regardless of where the contract was made, where you were paid, or where the employer is. If all the work happened in one country the question does not arise. For anyone who moved between India and the US mid-vesting, it decides the outcome.
Where services were performed partly inside and partly outside the US, the income is apportioned on a time basis: total pay multiplied by US workdays over total workdays. That is the general rule for compensation, and the IRS illustrates it with a worked example of an athlete paid for a season split across two countries.
Equity adds one question the athlete example does not: which period do you count days over? Grant to vest? Grant to exercise? The whole time you held the shares? The IRS answers it directly. Equity awards are treated as multi-year compensation, and for these purposes the applicable period runs from the grant date to the vesting date. For an RSU, the value taxed at vesting is apportioned across that window.
| Step | What happens |
|---|---|
| Grant date | 1 April 2023, while you were working in India. Four-year vesting, so the clock starts here. |
| Move to the US | 1 April 2025. Two of the four years are behind you, worked entirely in India. |
| Vesting date for the tranche | 1 April 2027. The relevant period is grant to vest: four years, of which two were worked in India and two in the US. |
| The split | Half the tranche is US-source compensation and half is foreign-source, because half the workdays in the grant-to-vest period were in each place. |
| What locks | That 50/50 is fixed on 1 April 2027. Selling in 2029, or moving back to India in 2028, does not change it. |
A note on evidence, because this is where the position is usually lost rather than argued. The allocation is a day count, and a day count needs records — travel dates, payroll location, work calendars. There is scope to use an alternative basis if it more properly reflects the source of the pay, but the burden sits with the employee to demonstrate it, not the employer. In practice the time basis with good records beats a better theory with poor ones.
The split locks on the vesting date
This is the most useful single fact on the page and the one almost no general article mentions. Once a tranche vests, its India/US split is fixed. The IRS puts it plainly: the percentage sourced to the United States is fixed from the day on which the award vests, and although exercising is the event that realises the income, the applicable period ends at vesting, not at exercise.
Three consequences follow, and they are all practical:
- Delaying a sale changes nothing about sourcing. You can defer realising gain, but you cannot change the character of what already vested. Holding on in the hope the position improves does not work.
- Moving after vesting is too late. Relocating back to India the year after a large tranche vests does not retrospectively make it foreign-source. The window closed on the vest date.
- So the planning window is before vesting, not before selling. If a move is in prospect and significant tranches are approaching, the sequence and timing genuinely matter — and that is a conversation to have in advance rather than in April.
One important qualification. A treaty can define that look-back period differently from the Code, and the IRS notes the UK-US treaty as one of the few that addresses stock compensation specifically, using grant-to-exercise rather than grant-to-vest. Where a treaty has no such provision the Code rule governs. We are not asserting what the India-US treaty does on this narrow point without reading it against a specific fact pattern — see our treaty guide for what it does more broadly, and treat the look-back as something to confirm rather than assume if a move sits between your vest and exercise dates.
Why sourcing means different things depending on your status
Here is a distinction that trips up otherwise careful reading. Most published guidance on sourcing equity compensation is written about nonresident aliens, because that is where sourcing determines whether the US can tax the income at all. If you are a US resident, sourcing does not exempt anything — but it is still doing important work.
| Your status | What sourcing does | Detail |
|---|---|---|
| Nonresident alien | Sourcing decides whether the US taxes it at all. | Only the portion attributable to services performed in the US is within US tax. The foreign-source portion is simply outside the US net. This is where getting the day count right is worth real money. |
| Arrival year (dual status) | Both rules apply, to different parts of the year. | Before your residency start date you are taxed like a nonresident, on US-source income only. From that date you are taxed on worldwide income. A tranche vesting either side of the line is the awkward case. |
| US resident | Sourcing does not reduce your US tax at all — it drives the credit. | You are taxed on worldwide income, so the foreign-source portion is still fully US-taxable. What sourcing determines is your foreign tax credit limitation, and therefore whether the Indian tax on that portion can actually be used. |
The middle row is the one that produces the most confusion in practice, because a single tranche can sit either side of your residency start date and the two halves of the year follow different rules. If you arrived in the US during a year in which significant equity vested, that year is worth preparing carefully rather than treating as a normal first return.
When both countries reach the same tranche
Put the two systems side by side and the overlap is obvious. India taxes the value of shares at vesting as a perquisite for someone resident there. The US taxes the value at vesting for someone resident here. Neither country is doing anything unusual — they simply both tax at the same moment, on the same amount.
So where a vesting period straddled a move, parts of the same tranche can be within both countries’ reach, and if you were a US resident in the vesting year your worldwide income includes all of it. The mechanism that prevents genuine double taxation is the foreign tax credit, not an exemption and not the treaty acting on its own.
Which is exactly why the sourcing split is not academic: the foreign-source portion sets the ceiling on the credit. Understate the foreign-source share and you cap your own relief. That is the connection between the two halves of this page.
Two complications belong to the credit rather than to this page, and both are covered in our foreign tax credit guide: India runs an April-to-March year against the US calendar year, so the Indian documents never align with the US return and have to be apportioned; and the credit is computed separately by income category, so credits are not freely interchangeable. Both bite hard on equity, because a single tranche can generate Indian tax in one Indian year and US tax in two US ones.
Selling the shares, and the 183-day trap
Once shares are yours, they are ordinary personal property and the compensation analysis is finished. Gain on selling personal property is sourced by a different rule entirely — to the seller’s tax home rather than to where any services were performed. So the sourcing of the sale depends on where you are when you sell, not on the history of the award.
For a US resident this changes little, since worldwide income is taxable anyway. For a nonresident alien it usually means the gain is foreign-source and outside US tax. And that generally-benign rule has an exception that lands on one specific group.
A nonresident alien present in the US for 183 days or more in the year is taxed at a flat 30% on capital gains, on the basis that they are treated as having a US tax home. Normally nobody is both present that long and still a nonresident — the exception is exempt individuals, which is students, teachers and trainees, whose days do not count toward the substantial presence test. So an F-1 student can be a nonresident for filing purposes and still face 30% on a stock sale, with no deductions against it and no long-term capital gain rate. It is the population most likely to assume the gain is simply outside US tax.
If that describes a year you have already filed, it is worth revisiting rather than leaving. And if it describes the year you are in, the timing of a sale relative to your day count is a real decision rather than a technicality.
ESPP has its own rules
An employee stock purchase plan is a statutory plan, which puts it in a different category from an RSU and from an ordinary stock option. The practical difference is where the tax point sits: you generally include nothing in income when you receive the option and nothing when you buy the shares at a discount. Tax is deferred to the disposition.
What happens then depends on whether you satisfied the plan’s statutory holding periods. Satisfy them and more of your profit is capital gain. Miss them — which is what happens on the common quick-sale strategy — and part of the profit is recharacterised as ordinary wages, added to your basis for computing the remaining gain. We are deliberately not printing the holding periods, the discount cap or the annual limit here: they are statutory but the IRS topic page points to Publication 525 for them rather than stating them, so read them there rather than from a summary.
The document to keep is Form 3922, which your employer files for the transfer of shares acquired under the plan. It carries the dates and values you need to work out how much of a later sale is ordinary income and how much is capital gain. People routinely discard it because no tax is due in the year it arrives, and then cannot compute the disposition correctly years later.
On the cross-border side, treat ESPP as having the same two-part structure as an RSU even though the timing differs. The part that is compensation follows the where-services-were-performed rule; the part that is capital gain follows the tax-home rule. Because a statutory plan defers everything to disposal, the interaction with a move between countries is genuinely more intricate than for an RSU, and it is the case we would want to look at on the actual dates rather than generalise about.
The state layer on top
Everything above is federal. If you also moved between US states during the vesting period, there is a second allocation exercise that follows similar logic under entirely different rules.
States generally tax compensation for services performed in the state, so a state you worked in during a vesting period can claim a share of a tranche that vests after you have left — often called a trailing liability. The difficulty is that each state writes its own allocation rule, some are markedly more assertive than others, and two states claiming overlapping shares of the same payment is a normal outcome rather than a mistake. Relief usually arrives as a credit on one return for tax paid to the other.
Keep this separate from the India apportionment. They answer different questions under different rules, and on a return where both apply they are easy to conflate — which is how one of them ends up unaddressed. Our Georgia and California guides cover the two state positions that come up most often with equity, and the state guides hub covers the rest.
Where this comes from
The sourcing rules, the grant-to-vest look-back and the 183-day rule are sourced to IRS guidance and to the IRS’s own published material on stock-based compensation for nonresident aliens. The award mechanics are sourced to IRS topic guidance and Publication 525. The Indian side is described by substance and is a question for an Indian adviser.
- IRS — US taxation of stock-based compensation received by nonresident aliens (webinar transcript)
- IRS — Source of income, personal service income, and the time-basis allocation
- IRS — Nonresident aliens, sourcing of income
- IRS — Taxation of capital gains of nonresident students, scholars and employees of foreign governments
- IRS — Topic no. 427, Stock options
- IRS — About Form 3922, transfer of stock acquired through an employee stock purchase plan
- IRS — Publication 525, Taxable and Nontaxable Income
- IRS — Publication 519, US Tax Guide for Aliens
Reviewed by Teja K, CPA · last reviewed . General information, not tax advice for your situation. Sourcing turns on your own dates and day counts. Confirm the Indian side with an Indian adviser before acting. How we research and review this.
Common questions
When are RSUs taxed in the US — at grant, at vesting, or when I sell?
At vesting, in almost every case. A grant of RSUs is a promise of future shares rather than a transfer of property, so nothing is taxable at grant. When the units vest and the shares become yours, the full market value on that date is ordinary wage income, it goes on your W-2, and your employer normally withholds by holding back a portion of the shares. From then on you simply own stock with a cost basis equal to that vest-date value, and any further movement in the price is a capital gain or loss when you sell, measured from the vest date for the holding period. Three dates, one taxable event, and the one people misidentify is the sale.
Can I make a section 83(b) election on my RSUs?
No, and this is worth being clear about because the question comes up constantly and the answer is structural rather than a matter of timing. An 83(b) election accelerates tax on property that has been transferred subject to a risk of forfeiture. At the grant of an RSU nothing has been transferred — you hold a contractual promise, not shares, with no voting rights and no dividends. Because there is no property for section 83 purposes, there is nothing an 83(b) election could apply to. If you are thinking of 83(b) you are probably thinking of restricted stock, which is a genuinely different instrument where shares are issued up front, or of certain option grants. RSUs are not that, whatever the plan documents are called.
My broker reported a zero cost basis on my RSU sale. What do I do?
Correct it, and do not simply transcribe the 1099-B. This is the single most expensive routine error in equity compensation and it is entirely avoidable. The value of the shares at vesting was already taxed as wages through your W-2. That amount is your cost basis. But brokers frequently report the basis as zero, or report only what you paid out of pocket, which for an RSU is nothing. If you file the form as received, the amount that was already taxed as wages gets taxed a second time as capital gain. The fix is to report the correct basis with the adjustment the return provides for, and to keep the vesting statements that prove the figure. Check every year, because a broker getting it right once is not a guarantee.
I moved from India to the US part-way through the vesting period. Is the whole RSU taxable in the US?
Not necessarily, and this is the heart of the matter. Equity compensation is pay for services, and pay for services is sourced to where the services were performed. Where the vesting period spans both countries, the income is apportioned on a time basis — US workdays over total workdays across the relevant period — and the IRS is explicit that for equity the relevant period runs from the grant date to the vesting date. So a tranche granted while you were in India and vesting after two years in each country is, on those facts, half US-source and half foreign-source. What that split does for you then depends on your status: for a nonresident it decides how much the US can tax, while for a US resident it does not reduce US tax at all but determines the foreign tax credit position. Either way the day count matters, and it needs contemporaneous records rather than a reconstruction years later.
India already taxed my RSU at vesting. Do I have to pay again in the US?
Potentially yes on the same slice, and the mechanism that stops it being taxed twice over is the foreign tax credit rather than an exemption. India taxes the value at vesting as a perquisite for someone who is a resident there; the US taxes the value at vesting for someone who is a resident here. When the vesting period straddled a move, both countries can have a legitimate claim on parts of the same tranche, and if you are a US resident in the vesting year your worldwide income includes the whole thing. Relief comes from claiming a credit for the Indian tax against the US tax on the foreign-source portion — which is exactly why the sourcing split is not an academic exercise, because it sets the ceiling on the credit. Two practical complications: India runs April to March against the US calendar year, so the documents never line up, and the credit is limited by category. Our foreign tax credit guide covers both.
Does the India-US treaty change how my RSU income is sourced?
Check it for your facts rather than assuming either way. The default is the Internal Revenue Code rule, which sets the look-back period for sourcing equity compensation from the grant date to the vesting date. A small number of US treaties address stock compensation specifically and define that period differently — the IRS gives the UK-US treaty as its example, where the look-back runs from grant to exercise instead. The difference is not cosmetic: it changes which workdays count, and where someone left the US between vesting and exercise it can change the answer substantially. Where a treaty contains no such provision, the Code rule stands. We deliberately do not assert what the India-US treaty does or does not say on this point without reading it against your fact pattern, and our treaty guide covers what that treaty does more generally.
I am on an F-1 visa and sold shares at a profit. Is the gain tax free?
Do not assume so — there is a rule here that catches precisely your situation and almost nobody in it knows about it. Capital gain on selling shares is normally sourced to the seller’s tax home, so for a nonresident alien it is generally foreign-source and outside US tax. But there is a specific provision taxing a nonresident alien’s capital gains at a flat 30% if they were present in the United States for 183 days or more during the year, on the basis that they are treated as having a US tax home. Ordinarily nobody is both present that long and still a nonresident — the exception is exempt individuals, which is exactly students, teachers and trainees, whose days do not count toward the substantial presence test. So an F-1 student present for most of the year can be a nonresident alien for filing purposes and still face 30% on a stock gain, with no deductions against it and no long-term capital gain rate. If you have sold appreciated shares while on F-1, this is worth checking before you file.
Are my US employer’s shares reportable on the FBAR or Form 8938?
Generally neither, while they are shares of a US company held in a US brokerage account — that is a domestic asset in a domestic account and both regimes are aimed at foreign ones. The answers change in two situations worth knowing. If the shares are in an account outside the United States, the account itself can be an FBAR item and a Form 8938 item regardless of what is inside it. And if your employer is an Indian company, or the shares are of a foreign parent, then directly held foreign stock is a specified foreign financial asset for Form 8938 even though it is not a foreign financial account for FBAR purposes — a genuine gap between the two forms. One reassurance: directly held employer shares are not a pooled investment vehicle, so the PFIC regime that catches Indian mutual funds is not in play here. Our Form 8938 guide sets out which holdings each form reaches.
I moved between US states and then my RSUs vested. Which state taxes it?
Possibly both, and the state layer follows a similar logic to the country layer without following the same rules. States generally tax compensation for services performed in the state, so a state you worked in during the vesting period can claim a share of a tranche that vests after you leave — the so-called trailing liability. The mechanics vary by state, which is the difficulty: each writes its own allocation rule, some are considerably more assertive than others, and two states claiming overlapping portions of the same payment is a normal outcome rather than an error. Relief usually comes through a credit on your new state’s return for tax paid to the old one. It is a separate exercise from the India apportionment and the two are frequently tangled together on the same return, so it is worth separating them deliberately. Our state guides cover the individual positions.
Equity vesting around a move between India and the US?
The split is decided by your dates and it is fixed on the vesting date, so the useful time to look at it is before the next tranche vests. We work out the apportionment, check the basis on what has already been sold, and tell you what is worth correcting.