RSU Cost Basis Step-Up Myth for NRIs

Assuming you have spent the last several years on H1B at a US tech company, a meaningful chunk of your net worth is sitting in vested RSUs of a single ticker. You have been told, often confidently and often by other returning friends, that moving back to India during the RNOR window gives your cost basis a free reset. Sell after you land, the story goes, and your Indian capital gains liability is computed off the value on the day you flew home, not off the original vesting price. It is a clean idea. It is also wrong.

There is no general step-up of cost basis on change of residential status under the Income-tax Act, 1961, for shares you already owned before becoming a resident. RNOR does something useful, but it does it on the taxability side — what India can reach during a limited window — not on the cost basis side. Mixing those two ideas up is how returnees end up with a much larger Indian tax bill than they planned for in the year they finally sell.

1. What actually happens at vest, in plain terms

When an RSU vests in the US, the FMV on the vesting date is taxed as ordinary employment income. That same FMV becomes the US cost basis for any future capital-gains computation. Your employer typically sells-to-cover for US payroll tax. Nothing about that vesting event rewrites itself when your visa stamp eventually lapses.

Indian tax law does not have a separate concept that voids that history. When you later sell those shares as an Indian resident, the Income-tax Act expects you to compute capital gains using your actual cost of acquisition and the actual date of acquisition. For shares acquired through an employer ESOP / RSU plan, Section 49(2AA) read with Section 17(2)(vi) treats the cost of acquisition as the FMV that was taken into account for perquisite valuation at allotment — typically the vest-date FMV in the case of an RSU. Section 2(42A) Explanation 1(hb) similarly anchors the holding period at allotment. The country of residence has changed. The acquisition facts, and the cost number that flows from them, have not.

2. What RNOR actually does

Resident but Not Ordinarily Resident is a sub-category under Section 6(6) of the Income-tax Act. While you are RNOR, the scope of income taxable in India under Section 5 is narrower than it is for a Resident and Ordinarily Resident. Foreign-source income that does not accrue or arise in India and is not received in India is generally outside the Indian net during the RNOR years.

Status     Foreign capital gains taxable in India?
NR         No (subject to source rules)
RNOR       Generally no, if the gain is foreign-source and not received in India
ROR        Yes, worldwide

The practical read: RNOR is a window, not a wand. It can shelter foreign-source gains realised during the window. It does not change the cost basis of the underlying asset. The day you tip into ROR, the same RSU lot becomes a worldwide-taxable holding with its original cost basis intact.

The line between "foreign-source and not received in India" and "received in India" is fact-specific. The Section 5 trigger is first receipt — where the income lands first when it accrues — not where you happen to transfer money later. Brokerage location, where the sale proceeds are first credited, and the source/accrual facts of the underlying gain are what a CA will look at. Routing already-received foreign proceeds into an Indian rupee account afterwards is a remittance, not a fresh receipt of income.

3. Where the DTAA fits

The India-US Double Taxation Avoidance Agreement, Article 4, contains the residence tie-breaker that decides which country treats you as resident for treaty purposes when both domestic laws claim you. Article 13 (Gains) is the capital-gains article, but in the India-US treaty it largely preserves each State's right to tax gains under its domestic law rather than carving out a detailed allocation. The actual relief from double taxation runs through Article 25 (Relief from Double Taxation), operationalised on the Indian side by Section 90 of the Income-tax Act, Rule 128 of the Income-tax Rules, 1962, and Form 67. Section 91 is the unilateral credit route for non-treaty countries and does not apply to India-US cases.

Question                                      Lives in
Domestic taxability                           Income-tax Act §5, §6, §9
Treaty residency tie-breaker                  India-US DTAA Article 4
Capital gains article                         India-US DTAA Article 13 (preserves domestic law)
Relief from double taxation                   India-US DTAA Article 25 + §90 + Rule 128 + Form 67

The treaty does not invent a cost-basis step-up either. What it does is allocate taxing rights and back that up with a credit machinery so the same rupee of gain is not taxed twice in absolute terms. The arithmetic is unforgiving and is genuinely a CA exercise — there is no spreadsheet shortcut that survives contact with Form 67 and the FTC ordering rules.

4. The pattern that catches people out

A common timeline looks like this: vest a chunk of RSUs in 2021 at $100, hold, leave the US in 2025 when the price is $300, sell in 2027 at $350 after becoming ROR. The gain that India taxes on sale is computed from $100, not $300. The "step-up to $300 on landing" assumption would have understated the Indian tax bill by the entire $100-to-$300 leg.

If the same lot had been sold in the RNOR window, with proceeds first received outside India through the US brokerage, the foreign-source RNOR carve-out is the lever that helps — not a step-up. Once the window closes and you are ROR, the lever is gone and the original cost basis is the only one the Indian Assessing Officer will accept.

A few patterns worth taking to your CA, not advice:

• Selling in the RNOR window vs. holding into ROR is one of the larger structural decisions a returnee makes. The trade-off is concentration risk, view on the stock, US tax frictions, and FX timing — not a free-step-up assumption.
• Where the sale proceeds are first received changes the "received in India" question under Section 5. Later remittance of money already received abroad is a different fact.
• Lot-level tracking matters. Different vest dates have different cost bases and different holding periods. The Indian computation needs lot-level inputs.
• Form 67 and the FTC claim window matter for any year a cross-border gain is reported in India.

5. What the calculator should show you

A capital-gains calculator that is honest about the cross-border case will show you the original cost basis (the vest-date FMV, in the original currency and at the historical FX rate), the holding period from acquisition to sale, the residential status in the year of sale, and the foreign-tax-credit position if the US has also taxed the same gain. It will not invent a step-up on the day you landed, and it will end with the same line every cross-border tool should end with: confirm with a qualified CA before you click sell.

The point is not that RNOR is overrated. RNOR is genuinely useful for a narrow window of foreign-source income. The point is that it is doing a different job from the one the cost-basis-step-up myth gives it.

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Sources:

• Income-tax Act, 1961 — Sections 5, 6, 6(6), 9, 17(2)(vi), 49(2AA), 90, 91 and Section 2(42A) Explanation 1(hb) (IndiaCode PDF)
• Convention between the Government of the United States of America and the Government of the Republic of India for the Avoidance of Double Taxation — Articles 4, 13 and 25 (Income-tax Department, USA Comprehensive Agreements)
• Finance (No. 2) Act, 2024 — capital-gains regime amendments effective 23 July 2024 (IndiaCode — Acts of Parliament)
• CBDT — Form 67 (User Manual) and Foreign Tax Credit machinery (Rule 128, Income-tax Rules, 1962) (Income-tax e-portal — Form 67 manual)