RSU Double Taxation: India-US Treaty Relief Guide

If you worked in India before moving to the US on an H-1B, your RSUs may be taxed by both countries. India taxes the portion of RSU income attributable to services performed in India, while the US taxes your worldwide income. Here is how to eliminate the double taxation.

How RSUs Get Double-Taxed Across India and the US

Double taxation on RSUs typically occurs in these scenarios:

• RSUs granted while working in India: India claims the right to tax the portion of RSU income earned while you were performing services in India, even if the RSUs vest after you move to the US.
• Multi-year vesting spans both countries: If you received a 4-year RSU grant, worked 2 years in India and 2 years in the US, India may tax 50% of the vesting income as perquisites under Indian tax law.
• US taxes the full amount: As a US tax resident, your W-2 includes the full RSU vesting income in Box 1. The US taxes 100% of it regardless of where the services were performed.

Without relief, you could pay Indian tax on 50% of the RSU income and US tax on 100% — resulting in double taxation on the Indian portion.

India-US Tax Treaty: Article 16 (Dependent Personal Services)

Article 16 of the India-US tax treaty addresses income from employment (dependent personal services). Under this article, employment income is taxable in the country where services are performed. For RSUs:

• The portion attributable to services in India is taxable by India
• The portion attributable to services in the US is taxable by the US
• Article 25 provides relief from double taxation through the Foreign Tax Credit mechanism

In practice, this means you can claim the Indian tax paid on the Indian-sourced portion as a Foreign Tax Credit on your US return, eliminating the double taxation.

Claiming Foreign Tax Credit on Form 1116 for RSU Tax

To claim the credit for Indian tax paid on RSU income:

• Step 1: Determine the Indian tax paid on the RSU income. This may be perquisite tax withheld by your Indian employer or advance tax paid.
• Step 2: Complete Form 1116 under the general limitation category (employment income is general limitation, not passive).
• Step 3: Enter the RSU income attributable to Indian services as foreign source income.
• Step 4: Enter the Indian tax paid (converted to USD using the exchange rate on the payment date) as foreign taxes paid.
• Step 5: Calculate the FTC limitation. The credit is limited to the US tax attributable to the foreign source income.

RSU Cost Basis Correction: The $0 Basis Problem

Beyond double taxation, RSUs create a separate issue when you sell the shares. Brokers typically report $0 cost basis on Form 1099-B because the income was reported on your W-2, not through the brokerage.

If you do not correct the basis on Form 8949, you will pay capital gains tax on the full sale proceeds instead of just the appreciation above the vesting FMV. This creates triple taxation: Indian perquisite tax + US ordinary income at vesting + US capital gains tax on the same amount.

Multi-Year RSU Vesting: Apportioning Between Countries

When RSUs vest over multiple years spanning both India and the US, the allocation methodology matters:

• Days-based allocation: Count the number of days you worked in each country during the vesting period (from grant to vest). The Indian-source portion equals (India days / total days) x vesting income.
• Grant-to-vest approach: Some practitioners use the period from grant date to vesting date. Others use the service inception date. The method must be reasonable and consistently applied.
• Documentation: Keep detailed travel records, passport stamps, and employment records showing your work location during the vesting period. Both the IRS and Indian tax authorities may request this.

Documentation Needed for Treaty Relief

• Indian Form 16: Shows salary and perquisite income (including RSU vesting) and tax withheld by your Indian employer.
• Indian Form 26AS: Annual tax statement showing all TDS and advance tax credits against your PAN.
• RSU vesting statements: From your employer's stock plan administrator showing grant dates, vest dates, FMV on vest, and shares vested.
• W-2 from US employer: Showing the full RSU vesting income in Box 1.
• Employment records: Showing your work location and transfer dates between India and the US.