TDS on RSU (Restricted stock unit also known as Sweat Equity) on VESTING and CGT (Capital Gan Tax) on SALE of Vested RSU – A Supplement To the ‘Critique’


The Supplement within is intended to sub-serve the purpose of the Critique, earlier displayed on the website of @ (the earlier Article)

An elaboration and a reiteration, as attempted herein, of some of the finer aspects, – though brought to focus but seemingly failed to percolate through even at this late hour, – may, -it is aspired,- further help in realising why the hitherto ongoing practice, left unchallenged, needs to be taken on, and pursued relentlessly, in order to once for all put an end to.

2. The subject matter is, or expected to be, of most concern particularly to high- end salaried employees, mainly in the IT Sector, engaged under a ‘contract of service’ (X ‘contract for service’)! The issues relate to the so called ‘fringe benefit’ of stock /share option extended by employers to employees.

Prefer to prudently ignore for the nonce the recent dire changes in the field reality of paradigm shift from ‘contract of service’ to ‘contract for service’! One has in mind the work culture gradually shifting to the new ideas of ‘moonlighting’ and ‘outsourcing of services’, because of the mushrooming ‘unicorns’ and ‘startups’ set in a fast track, so on so forth! So much so, provision by employer of ‘incentives’, as a tasty bite, mainly in the form of stock/share options, could not but be expected to gradually lose its sheen/glamour in employment sector?!

ASIDE: May, being unable to resist the natural temptation, not without logic or justification, add in side-lines that, in a manner of strictly speaking, it is akin to compensation for ‘non- compete’ undertaking given and has the ingredients of a ‘capital receipt’. To recall, as repeatedly held by courts, any such payment to employee is, therefore, not taxable in the hands of employee as ‘profits in lieu of salary’ .

Suggest to look through the experts’ commentary and case law in any leading TEXT BOOK, under sec 17 (3); also the apex court’s opinion despite the amendment of the law as espoused by tax law pundits! Of course, this is another but different long- drawn /stretched side of the story calling for an in-depth study- nay frightful research!

3. Now, getting back on to the intended track, for more on the topic on hand, may look through the Posts and Comments shared on inter alia FB and Linkedin, -which have been made a mention of also in the earlier Article.

TDS on RSU on VESTING and Capital Gan Tax

Looking back, the legislature itself may be found to have had a very grave doubt, -rather been in a serious predicament or dilemma, – on the very basic point namely, as to in which year to tax the benefit, – year of ‘option’ or when option is exercised (by employee) or when allotment of company’s ‘stock’ is made.

The law successively amended, eventually now in force, no doubt says that is to be taken as the year of ‘allotment’/ ‘vesting’ of RSU. However the intriguing point of poser is why and that should be left unchallenged despite all attendant oddities, thus far impudently remained oversighted , to wit?!

3.1 The concept of RSU per se, same way as company stock/share, is indisputably an intangible personal benefit. It has no doubt a value to employee. However, the moot point for an intelligent debate, to the end of reaching the right and substantially sustainable conclusion, is this: –

What is the point in time when the value ‘accrues’ to employee and is realised in money so as to be taxed as ‘income’,- under any of the specified HEADS and within its comprehensive legal connotation !

In other words, the point of issue under the freshly mooted debate, but regrettably in only a very limited circle, is, – whether or not RSU granted to employee can at all legitimately be taxed in the year of its ‘vesting’?

3.2 No doubt ‘equity share’ (or stock)- a property comprising a ‘bundle of rights’, is also an intangible PERSONAL property. But that is held by its acquirer, as evidenced by the document- ‘share certificate’ issued by the operating company. Under the company law and the governing rules and regulations, it cannot be transferred to another except by following the procedure laid down.

On the contrary, as regards RSU, when allotted, there is no such evidentiary document (similar to share certificate) issued to employee. The reason is obvious; unlike equity share, RSU so long as held /unsold cannot be transferred/ sold by employee, directly on his own, in stock market, to anyone else. And, for effecting transfer / sale of RSU, the prescribed special procedure is required to be followed; and more so, by and large, only through / in concurrence with the company that has allotted the RSU.

In the light of these observations, -as put in a nutshell, the view being canvassed is to the effect that, – deduction of tax from or taxation of RSU as ‘income’, on its vesting, is highly contestable.

Aside: Two of the other commonly known benefits, in kind, taxable as ‘perquisite’ are, – provision of car and accommodation. Indisputably, all such/similar benefits, in kind, become taxable and therefore, are being taxed as ‘income’ of employee, only in the year /for the period for which these are actually utilised/enjoyed by employee; provided there is a related cost to employer.

3.3 The expression used in the statute, – ‘whether convertible into money or not’ has a special significance exclusively to benefits/amenity provided in kind, – such as, user of car by employee for his personal purposes , and housing provided for personal use by employee and his family.

For a better appreciation and insightful grip of the not so obvious surrounding intricacies, suggest to go through, intimately, each and every kind of benefit or amenity similarly provided to employee, at a ‘cost’ to employer -as covered in Sec 17(2) to be rtw the prescribed Rules.

4. There is no scope for any controversy in a case in which employer- company allots/issues

its stock/share, to its own employees. For, when so allotted/issued, employee, as its acquirer /holder, – same way as any other common stock-/share- holder, has a right to sell and realise its money value; the money so realised becomes his income chargeable to tax.

If not so, then only, issues arise. For instance, RSU issued by a foreign holding company to employee of its group company – say, of its subsidiary, what really vests is not a ‘stock /share’ as such; but is merely a “RIGHT to ‘stock/share’ ”. As such, that could be treated as a ‘perquisite’ and taxed not earlier than the date of its transfer/sale; same way as ‘right to rights share’ and ‘right to bonus share’.

5. It is a well settled for long and firmly established proposition, – should the required ‘methodology’ to compute “income” be not provided in the statute, any attempt to levy tax must fail.

In support, the substance of the leading observations of the Supreme court in KP Verghese case reported @ might be worthwhile requoting, as often done before:


Moreover, if sub-section (2) is literally construed as applying even to cases where THE FULL VALUE OF THE CONSIDERATION in respect of the transfer is correctly declared or disclosed by the assessee and there is no understatement of the consideration, it would result in an amount being taxed which has neither accrued to the assessee nor been received by him and which from no viewpoint can be rationally considered as CAPITAL GAINS OR ANY OTHER TYPE OF INCOME. IT IS A WELL SETTLED RULE OF INTERPRETATION THAT THE COURT SHOULD AS FAR AS POSSIBLE AVOID THAT CONSTRUCTION WHICH ATTRIBUTES IRRATIONALITY TO THE LEGISLATURE.”

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In the context herein, accordingly, the point need to be urged is that, if the benefit of RSU is granted on a ‘ free of cost (to employee) basis’ -that is, ‘free of charge by employer’, – then taking the value of the perquisite as anything more than ‘nil’, by attributing a notional value arbitrarily and capriciously, is most certainly liable to be challenged as unconstitutional.

5.1 If scouted around, one is sure to find copious material in public domain, in the form of experts’ Articles, etc., bearing on the sleeves certain key takeaways to the following effect:

A restricted stock unit (RSU) is stock-based compensation issued by employer.

A vesting period exists before the RSU converts to actual common stock. Until then, it has no monetary worth.

Once the so called RSU, being an ‘intangible personal property’, converts to stock, then only- not until then, – has a transferrable money value, actually and factually realisable, so as attract levy of tax as ‘income’, even within its acceptable all-inclusive legal connotation .

5.2 The above referred crucial expression, – “the full value of consideration’, in fact, has been critically examined in numerous court decisions. One such instance is the SC Judgment , delivered way far back in the year 1967 (under the 1922 Act then in force) reported @

(Commissioner Of Income-Tax, West … vs George Henderson And Co. Ltd. on 26 April, 1967-Citation : (1967 66 ITR 622 SC).

Extracts (selected):

“5. It was conceded by … on behalf of the appellants that the transfer does not come within the mischief of the first proviso to section 12B(2),….. But it was contented on behalf of the appellants that the expression “full value of the consideration for which the sale, exchange or transfer of capital asset was made” appearing in section 12B(2) meant the market value of the asset transferred and on this ground the Appellate Tribunal was justified in taking the market value of the shares to be full value of the consideration. WE ARE UNABLE TO ACCEPT THIS CONTENTION AS CORRECT. IT IS MANIFEST THAT THE CONSIDERATION FOR THE TRANSFER OF CAPITAL ASSET IS WHAT THE TRANSFEROR RECEIVES IN LIEU OF THE ASSET HE PARTS WITH, NAMELY, MONEY OR MONEY’S WORTH AND, THEREFORE, THE VERY ASSET TRANSFERRED OR PARTED WITH CANNOT BE THE CONSIDERATION FOR THE TRANSFER. It follows that the expression “full consideration” in the main part of section 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only named the full value of the thing received by the transferor in exchange for the capital asset transferred by him. The consideration for the transfer is the thing received by the transferor in exchange for the asset transferred and it is not right to say that the asset transferred an parted with is itself the consideration for the transfer. ….. The legislature had to use the words “full value of the consideration” because it was dealing not merely with sale but with other types of transfer, such as exchange, where the consideration would be other than money. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs. 136 per share the full value of the consideration must be taken at the rate of Rs. 136 per share. The view that we have expressed as to the interpretation of the main part of section 12B(2) is borne out by the fact that in the first proviso to section 12B(2) the expression “full value of the consideration” is used in contradistinction with “fair market value of the capital asset” and there is an express power granted to the Income-tax Officer to “take the fair market value of the capital asset transferred” as “the full value of the consideration” and “fair market value of the capital asset transferred” and it is provided that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2), the market value of the asset transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. ………….”

6. For the reasons already stated, we are of the opinion that the expression “full value of the consideration” CANNOT BE CONSTRUED AS THE MARKET VALUE BUT AS THE PRICE BARGAINED FOR BY THE PARTIES TO THE SALE. ……..”

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5.3 What requires to be made a conscious noting is that the cited Apex Court’s is a ever binding opinion. That has never been challenged or disputed in any manner whatsoever. Accordingly, therefore, it could be strongly urged to be necessarily followed as THE PRECEDENT, at all times-that is, for the purposes of the successor Act of 1961 as well.

Why to say so emphatically? –

For, the righteous answer stands to be readily found in, besides the related several original provisions, – successively made amendments of the 1961Act.

A) For instance, look through the history of related amendments of the law made, lastly in the year 2023.

For an insightful appreciation of the viewpoint in mind, suggest to read through the Article @


” Transaction not registered before stamp authority: –

Section 50C further provides that where the consideration received or accruing as a result of transfer of a capital assets, being land or building or both is less than the value adopted or assessed or assessable by an authority of a state Govt. for the purpose of payment of stamp duty in respect of such transfer, THE VALUE SO ADOPTED OR ASSESSED OR ASSESSABLE SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF SUCH TRANSFER FOR COMPUTING CAPITAL GAIN.”

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As is to be readily inferred, the legislature, obviously because of the host of difficulties faced with in practical application and more importantly, in strictly following the SC Judgment in George Henderson’s case, coming in the way of protecting the Revenue’s interests, thought of resorting to the concept of ‘DEEMING’- as has been very liberally chosen to be done, time and again, wrongly so, in similar other contexts.

To make it readily understood, the clinching point in own mind is, that but for such ‘deeming’, ‘the full value of consideration’ for all such purposes or in all such similar contexts, ought not to be taken as the ‘value’ (or market value) of the ‘property of any kind’ as envisaged by the law; or being amenable to being ‘valued’ whatever be the known methods for doing so.

B). Also suggest to go through the Article @

Titled: Provisions of section 55 – ‘Stamp duty value’ X ‘Cost of Acquisition’ (Amendment – Rationalisation in Reverse Gear)

The contextual relevance of the ‘stamp value’ as spoken of in, and inserted by the referred amendment, to be treated as ‘fair market value’ / ‘cost of acquisition’ to purchaser , is not at all understood; and seems to be devoid of any logic or sense.

Aside: This aspect so also other related angles may be found to have been covered in Posts on this website itself; also, in the personal Blog -@ swamilook on the Topic of , – “FMV- FV- FP – Ready Referencer”

6. Imperative to look through what the IT Act itself Provides (:

A.) Sec 17 specially provides for taxation of income under the specified head of, – ‘Salaries’. And, the income so taxable is inclusive of ‘perquisites’ within its defined meaning.

Suggest to mindfully READ through the entire TEXT of the Provisions, of relevance, as outlined below: –

“17. For the purposes of sections 15 and 16 and of this section, —

(1) “salary” includes—…..

4(2) “perquisite” includes—




B.) For a proper understanding those must be read and construed not in isolation but conjointly/harmoniously.

♦ Rule 3, needs to be noted, came into being effective from 2009. To believe or say that takes into account and cover the changes in law made later – that is in 2010 is not but palpably misconceived; rather offends any thinking based on common sense.

At that point in time the relevant clause (viii) of sec 17 (2) read, – “the value of any other fringe benefit or amenity as may be prescribed.”

It is thus more than adequately clear that Rule 3 was made to prescribe how to compute the “the value of any other fringe benefit” as required by the then said clause (viii).

The referred sub-clause (viii), so also the other two sub-clauses (vi) and (vii), as since modified and now eventually in force, reads:


(vi) 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. For the purposes of this sub-clause, –

(a) “specified security” means 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;

(b) “sweat equity shares” means equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called;

(c) 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;


(e) “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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It goes without saying that the requirement of a NOTIFICATION as envisaged /mandated in (D) above, so far as known/wary of, has remained to be met, as yet – Any doubt, any longer?!

Should the Answer be only in the negative, – inescapably so, then it must necessarily follow that there is no methodology in the law for computing the value,- neither ‘market value’ or ‘fair market value’, of ‘RSU’ , an intangible personal property at the point in time of its vesting.

Premised so, on that ground itself, on a stand-alone basis, relying stoutly on the SC Judgment in Srinivasa’s case the ongoing practice of TDS/Taxation of RSU on its vesting, unwittingly so, should be stoutly challenged and stressed to be illegal/illegitimate.

7. Course Of Action Open to Aggrieved Employee (in own personal view):

Hindustan Lever Limited Vs JCIT (Calcutta High Court)

“9. Therefore, the mistake must be apparent from the records, meaning thereby no external help either on fact or in law is required to detect such mistake. The mistake shall be so obvious that can easily be corrected, to wit arithmetical mistake, wrong quotation of section, etc. A large number of decisions have been cited and in fact it has been time and again explained with some extent of repetition by the judicial authorities. In the case of Volkart Brothers the scope of Section 154 was explained and interpreted as follows (headnote):

A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may be conceivably two opinions. A decision on a debatable point of law is not a mistake apparent from the record.”

Now, turning to the point(s) of issue /non-issue on hand, the crucial aspects calling for focus are these:

The benefit of RSU allotted by foreign parent company to employee of its Indian Subsidiary company- ‘free of cost to employee’ and ‘free of charge by employer’, – is not the foreign company’s stock/share; and, therefore, at the point in time of its ‘vesting’ the benefit does not have the characteristics of stock/share.- at best, is a potential ‘right to stock /share’- same way as ‘right to rights share’ or ‘right to bonus share’ .

Imputing a notional value for TDS /Taxation of the benefit as its ‘perquisite value’ is patently wrong and needs to be accordingly struck down as illegal/illegitimate.

There is, -so also could conceivably be, -no ‘cost of acquisition’ for the RSU, on its ‘vesting’.

Further, no Notification as envisaged by law (as brought out herein before) has been issued for computing ‘FMV’; premised so, there being no mechanism in law, taxation of ‘perquisite’ as ‘income’ is a non-stater; hence should fail !?

On the foregoing grounds, it could be validly urged that both TDS made by foreign company on RSU and taxation thereof by AO in assessment proceedings are clearly in violation of the two above cited SC Judgments, – Srinivasa’s case and George Henderson And Co.’s case. And, as such, there are apparent mistakes requiring to be rectified u/s 154.

EPILOGUE : In the light of the foregoing observations, it is now left to the aggrieved employees to consider and decide how best to proceed. No need to specifically say that they should, for obvious reasons, do so, necessarily in consultation with and under the competent advice/guidance of a reliably eminent lawyer in field practice.

Disclaimer: To confess, honestly, no pains have been taken to avoid repetition of any sort but has been deliberately left unedited. For, in personal perspective, such a gimmick could help and enable one all having vested interests- as a professional or otherwise, in getting a better grip of the personal thoughts and viewpoints impersonally shared above.

TAIL Note: Open to be EDITED/ VALUE ADDED, – in deference to the INVITE already extended in the earlier Article to the eminent ‘experts’ infield practice!

For useful guidance, recommend to do consult, without any compunctions, the related posts, – besides on FB and Linkedin, in the personal Google Blogs (‘swamilook’) and on the website of itatonline – that has been done in specific reference to certain other quite related Orders of the ITAT, passed as recently as in the years 2020 and 2021.

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December 2023