RSUs Vesting Across Borders: Tax Sourcing and Withholding Gaps

(INDIA TO THE U.S. (H-1B) OR U.S. TO ANOTHER JURISDICTION) A rising number of cross-border workers are being hit with surprise tax bills as Restricted Stock Units (RSUs) vest after a move across borders, exposing a quiet but costly gap in tax‑sourcing and payroll withholding.

Employees shifting from India to the United States on H‑1B visas, or leaving the United States for roles in Canada or Singapore, are finding that the country where they now live may tax the vest while the country where they earned the grant may also claim a slice. Employers, meanwhile, often lack a clear way to withhold for the “old” country once a worker has switched payrolls. The result is a tangle of liabilities that can leave people paying out of pocket at vesting and again at filing, and companies scrambling to reconcile compliance risks across jurisdictions.

How the tax split works (grant-to-vest sourcing)

Many tax systems tie the right to tax RSU income to the period between grant and vest, counting workdays spent in each country. For example, if a worker spent 60% of the grant-to-vest time in the U.S. and 40% in India, then generally 60% of the RSU income is treated as U.S.-sourced and 40% as India-sourced.

This sounds simple until the vest date comes after a relocation. If the worker has left the first country and no payroll exists there, withholding can fail — not by design but because no mechanism exists to collect tax for a prior period once the worker has moved. When that happens:

• Employees may need to make manual estimated payments.
• They must reconcile across two tax returns months later.
• Employers may scramble to identify compliance exposures.

Common mobility scenarios

• Graduates who started on F‑1/OPT and shifted to H‑1B may receive grants during OPT and vest later under H‑1B or permanent residency. Payroll changes can complicate withholding.
• H‑1B transfers from the U.S. to Canada or Singapore can create vest events taxed in the new home while prior U.S.-sourced workdays still claim part of the income.
• Indian citizens returning home after years in the U.S. may vest while Indian tax residency is restored, pulling the income into India’s global tax net even as U.S. sourcing rules assert rights.

Each case raises the same question: which system gets priority, and when?

Taxing moments and the core problem

• The taxing moment is typically the vest, when RSUs convert into shares and become wage income.
• RSUs are usually treated as ordinary income at vest, subject to payroll and income taxes.
• Later sales of the shares are taxed as capital gains based on holding period and local rules.

The core problem is not classification but apportionment: the grant‑to‑vest sourcing method prorates income across countries based on where work was performed. If payroll exists in each relevant jurisdiction at the right times, withholding can work. If not, no one may be able to withhold for the first jurisdiction, leaving the employee to settle directly.

Payroll mechanics and practical gaps

• A U.S. payroll may not have legal authority to withhold Indian tax for past India workdays.
• An Indian payroll may have been closed when the employee left for the U.S.
• A Canadian or Singapore payroll may not be set up to collect U.S. tax tied to earlier U.S. service.

These gaps are not rare edge cases — they’re embedded in how equity compensation crosses borders. When companies lack tax equalization or shadow payrolls, they often only discover a mismatch after a vesting event exposes missing withholding.

Importance of documentation

Workers with mobile careers are urged to keep exact records of:

• Grant dates
• Vest dates
• Relocation dates
• Where they spent workdays during the grant‑to‑vest window

A careful calendar becomes the basis for apportionment between countries. Without it, people face rough estimates that can materially alter tax‑sourcing percentages and trigger audit disputes.

If one jurisdiction taxes at grant, another at vest, and a third at sale, timing mismatches can spoil credit claims and leave income effectively taxed twice without an easy fix.

Even when treaties allow a credit, the credit window might not match the year in which the other country imposed tax.

India‑U.S. specifics and the DTAA

• If a person is an Indian tax resident when RSUs vest, the vest is part of global income and can be taxed in India.
• Where grant‑to‑vest workdays were in the U.S., U.S. law can also claim a share.
• Relief often depends on the India‑U.S. Double Taxation Avoidance Agreement (DTAA), which can allow a foreign tax credit in India for U.S. taxes paid, subject to limits and documentation.

Analysis by VisaVerge.com notes that assignees who fail to document sourcing face the hardest time claiming credits later, because both systems expect a clear breakdown of where income was earned.

For official guidance, taxpayers often start at the Income Tax Department of India website: https://www.incometax.gov.in/.

Outbound assignees and missing U.S. withholding

When an employee moves out of the U.S.:

• The new country may tax the vest as local wages and charge social taxes not present in the U.S.
• The U.S.-sourced portion tied to earlier workdays still exists, but there may be no practical way for the employer to collect it at vest if the employee is off U.S. payroll.
• Months later, the employee may file a U.S. return reporting wage income that never appeared on a U.S. pay stub, impacting Social Security and Medicare treatment if applicable.

Where a shadow payroll is not used, employees often must claim credits across returns and may find credit timing mismatches or partial disallowances.

Status changes (F‑1 → H‑1B) and payroll implications

• Immigration labels matter less for tax than residency and workdays, but status changes can change payroll and withholding capability.
• If an RSU grant occurs during OPT and vests after transition to H‑1B, the company running payroll at vest may not withhold for the country that provided part of the earned service.
• Returning to India after such a sequence can require including earlier vests on Indian returns, and sales might trigger Indian capital gains treatment.

The worker’s best defense: a paper trail that tracks each share’s journey from grant → vest → sale, and documents who withheld what, where.

Practical cash planning and broker mechanics

• In many vesting quarters, brokers sell a portion of shares to cover tax that the current payroll can collect.
• That often covers only the “here and now”; the “there and then” tax claimed by the old jurisdiction may remain unpaid.
• Workers often must plan cash to make estimated payments to prior jurisdictions; without planning they may be forced to sell additional shares at unfavorable times.

The sticker shock is often the split of tax bills across countries and timing, not necessarily the total tax.

Company policies that can help

Common employer approaches:

• Tax equalization: the company steps in to settle cross-border liabilities in exchange for a hypothetical tax.
• Shadow payrolls: mirror wage reporting in each relevant country to allow correct withholding.

Many firms do neither, especially for early-career hires or contractors. At minimum, companies should:

• Inform employees early that RSU tax at vest may hit two systems
• Suggest consulting a cross-border tax advisor

Without those steps, employees often learn about splits only after receiving a tax notice.

Reporting and compliance for returnees to India

• India has higher focus on global income disclosures and foreign asset reporting.
• RSU vests can fall under full reporting obligations for residents and NRIs who return.
• Those with backlogs of unvested grants should proactively map sourcing and credit claims.

The Income Tax Department of India provides official guidance and filing systems; taxpayers typically consult local professionals for methods and documentary proof to support foreign tax credits.

Practical guidance from tax practitioners

Common, strict advice:

1. Keep clean, dated records of grant/vest/relocation/workdays.
2. Ask payroll which jurisdictions they will cover at vest.
3. Assume the country you left behind may still expect a portion of the RSU income.

Example: a developer who earned half a grant in Bengaluru and half in California will typically split the income. If vesting occurs after moving to the U.S., U.S. payroll may collect federal/state tax on the full vest, but only the U.S.-sourced portion is truly U.S. income under grant‑to‑vest rules. India may assert tax on the India‑sourced portion. The developer must file returns in both countries and claim credits where allowed.

Year-of-move complications and vest cadence

• Mid-year residency changes can produce overlapping residency windows, making apportionment harder.
• Monthly vesting helps stage collection but increases reconciliation entries.
• Annual cliff vests can create a single large event that neither payroll is ready to handle if moves happened mid-cycle.

Capital gains vs. wage sourcing

• Wage tax is typically assessed at vest; capital gains apply on later sale based on basis set at vest.
• Timing and residence at sale matter for capital gains and do not generally change the grant‑to‑vest wage sourcing split.
• Good record-keeping of vest date and fair market value per lot is critical to establish basis and avoid overtaxation on sale.

Plan documents and mobility clauses

• Some RSU plans now include mobility clauses stating income will be sourced by grant‑to‑vest workdays and withholding may occur in multiple countries.
• Such clauses prepare employees for two‑jurisdiction events but do not create legal authority to collect old‑country tax if the legacy payroll is closed.
• Practical solutions include keeping a shadow payroll open during vesting or setting aside cash for estimated payments.

Strategic considerations for India’s tech diaspora

• For many Indian engineers, repatriation or outbound moves mean assuming both India and the U.S. may claim parts of RSU income.
• The split is typically based on workdays between grant and vest.
• Treaty credits may be available but require documentation and timing alignment.
• Payroll systems alone cannot solve these issues — only careful records and early cash planning can smooth the event.

Policy and industry implications

• This stress arises from equity pay in a highly mobile workforce, not from new laws.
• RSUs are long-term incentives, but frequent moves create multi-jurisdiction vest events even for mid-level staff.
• Companies must weigh administrative cost against equity’s retention benefits; some mitigate split risk with cash bonuses or restricted cash.

Governments are increasing scrutiny on foreign asset reporting and cross-border wage audits, signaling tighter compliance. For workers and companies, the message is:

If RSUs vest after a move, expect both sourcing and withholding questions, and be ready to answer with documents.

Practical checklist before and at vest

• Map the grant-to-vest period against travel and payroll history.
• Ask the employer which jurisdictions will be covered at vest.
• If the old country cannot be covered through payroll:
  • Set aside funds and plan an estimated payment.
  • Gather statements and certificates proving tax paid in the other country if claiming treaty credit.
• Keep FMV and vest-date records for each share lot.

None of these steps is glamorous, but they are the difference between a smooth vest and a shock tax bill. As cross-border work rises, expect more attention on RSU tax-sourcing and a push for clearer guidance from authorities to align timing and credit rules across jurisdictions.