If you work for a listed company, either in India or abroad, a part of your compensation might be in the form of restricted stock units, or RSUs. These RSUs are granted when you join, and in further compensation cycles, and are locked until they vest. Once these RSUs vest, they behave as any other common stock in the portfolio, and can be held, or sold anytime, as long as the trading window is open.

A lot of employees are confused about what to do with these RSUs once they vest. If the company is doing really good, it might be tempting to just hold on to the stock. Others may be undecided, and let the RSUs accumulate due to indecisiveness or inaction. If the issue is not addressed on time, the RSUs can grow into a very large part of the portfolio.

Risks with Holding the RSUs

Concentration Risk

Holding on to the RSUs might lead to a situation where they form a major part (>30%) of your overall portfolio. This exposes you to the classic concentration risk. Single stocks are more volatile than a well-diversified portfolio. A large concentration in your portfolio increases its volatility, and the whole portfolio can take a dive if the company suffers.

This risk is even more amplified in case of RSUs, since your employment and compensation are also tied to the same company. If the company were to suffer, you might lose your savings and your job at the same time, which can lead you to lock in any unrealized losses.

An extreme example for this is the case of Enron. It was valued at over $70 billion at its peak, until a fraud scandal caused its stock price to plummet by 95% in a single year, and it ultimately had to file for bankruptcy. Enron employees’ retirement plan was heavily invested in the company stock, and they were completely wiped out. (See: Employees’ Retirement Plan Is a Victim as Enron Tumbles)

Liquidity Risk

Since an RSU behaves like a common stock after vest, and can be traded on an exchange, they are fairly liquid, in contrast to startup ESOPs. But, since RSUs are your employer stock, and you might have material insider information about the company, most companies enforce a trading window system.

The trading windows usually closes a month before quarterly results, and open after the results are announced. This means you effectively have no access to this stock for 4 months in an year. If you need a large amount due to a medical emergency, or any large expense, you are out of luck. Insider trading policies usually restrict offering the stock as a collateral, or holding it in a margin account, so there’s no way to access the money once the window closes.

Taxation

RSUs are taxed as income when they vest, and any further changes in value are treated as Capital Gains/Losses for tax treatment. The following section is applicable only if the RSUs for a company listed in a foreign country.

If you sell at vest, you simply pay income taxes on slab, and report the vested and sold shared in Schedule FA for the year. If you choose to hold on to them, your tax reporting just got insanely complicated. You need the report the unsold RSUs in Schedule FA every year you keep them, even if you do not sell. If you receive any dividends, you need to fill Schedule OS (Income from other sources), Schedule FSI (Foreign Source Income), and Form 67 (to get a refund for taxes withheld abroad). If you sell them later, you’ll also have to report the Capital Gains in Schedule CG.

If the stock belongs to a US company, your family is in for a lot of trouble, in case of your untimely demise. Any US assets held by a non-resident alien (yes, you were an alien all along), if their gross values is more than $60,000) are subject to US estate taxes before they can be inherited by your heirs. The tax rate starts at 18%, and quickly goes up to 40%. This also requires the estate to go through a complicated probate process in the US, before your family sees any money. I have heard of a case where an employee of a US-based company in India passed away from COVID, and his RSUs were stuck in the process for more than 3 years.

Conclusion

If a large part of your compensation is in the form of RSUs, the most prudent option would be to sell on vest. If you’re bullish on your specific company or sector, you can choose to hold on to some of the RSUs, as long as they are a small portion of your overall portfolio (less than 20%). You can also diversify in a sector ETF as long as your company’s stock is not more than 5% or 10% of the ETF value, to mitigate the liquidity risk (the exact percentage depends on your company’s insider trading policies).

The best way to take the decision is to just ask youself, if you received an equivalent amount of cash instead of the RSUs, would you still invest all of it in your company stock? If the answer is no, you know what to do.