Taxation of U.S. Stock Compensation While Living in India

(INDIA) Indian-origin tech workers who shifted back home while holding U.S. stock compensation are entering tax season with a sharper warning: the same shares can be taxed in both countries when vesting or sales happen after a move, and timing now matters more than ever. Advisors say the most common flashpoints in 2025 involve restricted stock units (RSUs) and employee stock purchase plans (ESPPs) issued by U.S. employers, with income treated as salary at vest or purchase in the United States 🇺🇸 and as salary in India if the related work is performed here. That overlap is driving fresh attention to foreign tax credits and treaty relief.

Basic rule: character of income and where it’s taxed

• For those still within the U.S. tax net (U.S. citizens, Green Card holders, or U.S. tax residents), pay from U.S. stock awards keeps its character regardless of where they live:
  • RSUs → taxed as salary at vest in the U.S.
  • ESPP discounts → taxed as salary at purchase in the U.S.
  • Capital gains → taxed when shares are sold in the U.S.
• In India:
  • The same RSU vest is treated as salary if the related work was performed in India.
  • Any later sale of those shares is taxed as capital gains.

The practical result is dual-country taxation in many situations, so careful planning is required to avoid being taxed twice on the same amount.

Split sourcing and why the move date matters

Professionals caution that a move date can split income sourcing. If a vesting period or ESPP purchase period spans days worked in both countries:

• The portion attributable to days worked in India is taxed as salary in India, even if the U.S. employer withheld tax abroad.
• This is the essence of split sourcing and explains why the Foreign Tax Credit (FTC) is essential.

According to VisaVerge.com analysis, many remote workers who returned for family reasons or to start companies are now reconciling grant agreements and brokerage statements to match workdays to vest dates so they can claim credits in the right direction. The aim is simple: pay once, not twice.

Case studies (examples)

• Meera moved to Bengaluru in 2025 but still had RSUs vesting quarterly from her U.S. employer.
  • The U.S. treats each vest as salary income at vesting.
  • India taxes the same amount as salary because she performed the related work in India.
  • She must file in both countries and use a credit to offset the lower of the two taxes.
• Arjun bought stock through an ESPP in the U.S. at a 15% discount and later sold while living in India.
  • The discount portion is salary and must be sourced to where the work occurred (potentially split).
  • The sale is a capital gain taxed in both places, again requiring careful credit allocation.

Indian capital gains and other sale rules

• Listed U.S. stocks are treated as foreign capital assets in India.
• Holding periods:
  • Held for fewer than 24 months → short-term capital gain, taxed at the individual’s slab rate.
  • Held for more than 24 months → long-term capital gain, taxed at 20% with indexation.
  • Indexation can reduce the tax bite by adjusting cost for inflation.
• Losses:
  • Losses from U.S. stock sales may be set off against other capital gains in India.
  • Losses can be carried forward for up to 8 years, provided returns are filed on time.
• Dividends from U.S. shares: taxed in India at slab rates, with credit for U.S. withholding under the treaty (often cited around 25% in practice).

Employer obligations and payroll mechanics in India

• India treats RSU vests and option exercises as a perquisite under Section 17(2)(vi) of the Income Tax Act.
• Companies are expected to deduct TDS at the point of vest or exercise based on fair market value.
  • This payroll withholding helps workers meet India tax obligations while they sort out credits for U.S. withholding.
• For startups registered with DPIIT, ESOP taxes can be deferred for up to five years (or until exit/sale), easing cash flow for employees.
  • Note: deferral shifts the tax timing; it does not eliminate the tax.

U.S. filing obligations and relevant forms

U.S. filing remains mandatory for those within the U.S. tax system. Important forms and guidance:

• Report income on Form 1040 — see the IRS page: About Form 1040
• Sales reflected on Schedule D (Form 1040) — see: About Schedule D (Form 1040)
• Cross-border foreign tax credit claims on Form 1116 — see: About Form 1116
• Foreign account reporting (FBAR) via FinCEN 114 — see: Report Foreign Bank and Financial Accounts (FBAR)

Common missteps and practical advice

• The most common mistake is assuming a vest or ESPP discount is already taxed in the U.S. and thus not taxable in India. In reality:
  • India taxes salary-related portions tied to work performed in India even if tax was withheld abroad.
  • Credits bridge the overlap; they are not a shield that eliminates India tax automatically.
• Workers must:
  • Tie income to the correct periods (days worked in each country).
  • Document the split carefully.
  • Claim credits in the appropriate country.

Proper payroll reporting in India after a move helps by recording the perquisite at vest/exercise and remitting tax locally, which can then be used to offset U.S. tax if the person remains a U.S. taxpayer.

Timing strategies and holding periods

• Dates matter for tax outcomes:
  • Some families delay selling vested shares to reach the 24-month threshold in India and qualify for 20% long-term treatment with indexation.
  • Others weigh U.S. holding period rules to avoid short-term capital gain treatment in the U.S.
• The holding-period clocks differ across jurisdictions; aligning them where possible can reduce total tax.
• Recommended records to keep:
  • Vesting schedules
  • Grant letters
  • W-2 or equivalent payroll statements
  • Brokerage confirms

Clean records make filing claims easier and strengthen positions if the tax authorities question reported allocations.

Special cases: joint accounts, unlisted shares, founders

• Joint accounts and founders holding unlisted foreign shares add compliance complexity.
  • Unlisted foreign shares may require a Category One Merchant Banker valuation to set fair market value for India tax at exercise.
• Founders with DPIIT-recognized startup options may use deferral rules to ease cash flow, but the tax liability still arises later (sale/exit).
• Each event (vest, exercise, sale, deferral end) adds a date that can split sourcing across borders.

Policy logic and filing expectations

• U.S. rules focus on well-known triggers: vest, purchase, sale.
• India taxes residents on worldwide income, then uses treaty credits to reduce double taxation.
• Dual-country taxation is common for cross-border pay; the system expects:
  1. Filing both returns,
  2. Computing overlaps,
  3. Claiming relief so the same rupee/dollar is not taxed twice.

Key takeaway: credits are the handshake between systems — they coordinate taxes across borders but require precise documentation and timing. They are not a shortcut.

First-year return considerations and corrections

• Returnees who move mid-year may see salary and capital gains in a single filing season:
  • Perquisite income from vests
  • Sales of old ESPP shares
  • New Indian payroll salary
  • Dividends from U.S. accounts
• Losses can offset gains; if they cannot, carry-forward rules may help — subject to timely filing.
• Employer mistakes on perquisite valuation can be corrected with revised TDS certificates and updated filings if caught promptly.

Practical habits that reduce problems

People with smoother experiences tend to do the following:

• Inform employer payroll teams of move dates early so TDS is correct in India.
• Wait for long-term status before selling when feasible to save tax in India.
• Track U.S. holding periods to avoid short-term treatment there.
• Keep every grant notice and trade confirm in a single folder for easy filing and proof.
• List every vest, purchase, and sale; match those events to days worked in each country; then apply credits accordingly.

The rules reward dates, documents, and careful claims, not guesswork. As 2025 filings roll in, advisors expect more questions on unwinding concentrated positions, valuing RSUs that vest near a move date, and harvesting losses to soften gains. Those choices hinge on grant terms, personal risk tolerance, and meticulous record-keeping.