If you follow corporate finance, employee compensation, or stock market news, you may have heard the term Restricted Stock Units (RSUs). Global companies like Amazon, Microsoft, Google, and Meta frequently use RSUs to reward employees. In India too, startups and tech giants have started offering RSUs as part of their employee compensation packages.
But what exactly are RSUs? How do they work? And most importantly, should you consider them a valuable part of your salary or a risky perk?
In this detailed guide, we will explain:
- What are Restricted Stock Units (RSUs)?
- How RSUs work
- Vesting schedules and conditions
- RSUs vs ESOPs vs Stock Options
- Tax implications of RSUs in India and globally
- Benefits and risks of RSUs
- FAQs for better clarity
By the end of this article, you will have a complete understanding of RSUs and how they impact both employees and investors.
What are Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are a form of equity compensation given by companies to employees. Instead of paying only cash salaries, companies offer shares of the company (stock) as part of the package.
The term “restricted” means the employee does not get full ownership of these shares immediately. The employee must meet certain conditions, usually related to time (vesting period) or performance goals, before the shares are fully theirs.
👉 In short: RSUs are company shares promised to employees, but they come with restrictions until vested.
How Do RSUs Work?
Let’s break down the RSU process step by step.
- Grant – The company promises an employee 1,000 RSUs as part of their compensation package.
- Vesting Schedule – The RSUs vest over time. For example, 25% per year for 4 years.
- Vesting – Each year, a portion of RSUs becomes owned by the employee. If the employee leaves before full vesting, they lose the unvested shares.
- Conversion to Shares – Once vested, RSUs are converted into company shares.
- Selling Shares – The employee can hold or sell shares in the stock market (if the company is listed).
Example:
A software engineer at Google receives 1,000 RSUs with a 4-year vesting schedule (25% each year). If the stock price is $100, then:
- Year 1: 250 shares = $25,000
- Year 2: 250 shares = $25,000
- Year 3: 250 shares = $25,000
- Year 4: 250 shares = $25,000
👉 Total Value = $100,000 over 4 years.
Vesting Schedules for RSUs
Vesting is the most critical part of RSUs. There are two main types:
- Time-based Vesting
- RSUs vest over a period of time, such as 25% per year for 4 years.
- Ensures employees stay with the company for a minimum period.
- Performance-based Vesting
- RSUs vest only when the company or employee meets specific performance goals.
- Example: RSUs vest if the company achieves a certain revenue target or stock price.
- Hybrid Vesting
- A combination of time and performance requirements.
RSUs vs ESOPs vs Stock Options
Many employees confuse RSUs with ESOPs (Employee Stock Option Plans) or Stock Options. Here’s a comparison:
| Feature | RSUs | ESOPs (Options) | Stock Options (General) |
|---|---|---|---|
| Ownership | Actual shares after vesting | Right to buy shares at a fixed price | Right to buy shares at a fixed price |
| Upfront Cost | No | Yes (exercise price) | Yes |
| Value | Always has some value if the stock is above zero | Value only if stock price > exercise price | Same as ESOPs |
| Risk | Lower | Higher (if stock price falls below exercise price, worthless) | Higher |
👉 RSUs are considered more employee-friendly compared to ESOPs because there’s no upfront cost.
Taxation of RSUs
Tax rules for RSUs vary by country. Let’s look at two major cases:
1. Taxation of RSUs in India
- At vesting: The value of vested RSUs is considered part of your salary and taxed as perquisite under “Income from Salary”.
- At sale of shares: When you sell, capital gains tax applies.
- If held for less than 24 months: Short-term capital gains tax as per your slab.
- If held for more than 24 months: Long-term capital gains tax (20% with indexation).
2. Taxation of RSUs in the USA
- At vesting: RSUs are taxed as ordinary income.
- At sale: Capital gains tax applies on the difference between sale price and fair market value at vesting.
👉 Employees should plan their taxes carefully to avoid heavy tax burdens.
Benefits of RSUs
- No Upfront Cost – Unlike stock options, you don’t pay to exercise RSUs.
- Guaranteed Value – As long as the stock has some value, RSUs are worth something.
- Employee Retention – Encourages employees to stay with the company until vesting.
- Alignment with Company Growth – Employees benefit directly if the company performs well.
Risks and Limitations of RSUs
- Tax Burden at Vesting – You pay tax even if you don’t sell the shares.
- Stock Price Volatility – Value depends on stock price; if it crashes, your RSUs lose value.
- Liquidity Issues – If the company is private (not listed), you cannot sell immediately.
- Golden Handcuffs – Employees may feel forced to stay just to unlock RSUs.
RSUs in Indian Companies
While RSUs are common in the US, Indian startups and IT giants are adopting them too. Examples include:
- Infosys
- Wipro
- Flipkart
- Freshworks
- Zomato
This trend is expected to grow as companies compete for top talent.
RSUs for Investors
For outside investors (not employees), RSUs signal that the company is serious about employee retention and growth. However, excessive RSUs can cause dilution of shares, reducing earnings per share (EPS). Investors must watch how companies manage stock-based compensation.
Frequently Asked Questions (FAQs)
Q1. Do RSUs have an expiry date?
No, but they must vest before you own them. Once vested, they are yours.
Q2. What happens to RSUs if I leave the company?
Unvested RSUs are forfeited. Vested RSUs remain with you.
Q3. Can private companies issue RSUs?
Yes, but you may not be able to sell until the company goes public or is acquired.
Q4. Are RSUs better than ESOPs?
For employees, RSUs are usually better because they don’t require paying an exercise price.
Q5. Do all companies give RSUs?
No, only certain companies (especially large corporations and startups) use RSUs as part of compensation.
Conclusion
Restricted Stock Units (RSUs) are a modern and powerful way for companies to reward employees. They provide ownership, align employee interests with company growth, and can be highly valuable if the company performs well.
However, employees must understand vesting schedules, tax implications, and risks of volatility before relying too heavily on RSUs for wealth building.
For investors, RSUs are a signal of employee retention, but excessive dilution should be monitored.
👉 In short: RSUs can be a wealth-building opportunity for employees, but they must be managed wisely.