Foreign Withholding on RSU (1042-S) and India DTAA Credit: What Goes in Schedule TR
US withholding on RSU vest — typically 30% for non-resident aliens, reduced under the India-US DTAA — is reported on IRS Form 1042-S. In India, claim a foreign tax credit in Schedule TR and Form 67, limited to the lower of the Indian or foreign tax on that income. File Form 67 before the ITR due date.
Harun Raaj
Chartered Accountant · Harun Raaj & Associates
Short answer: When a US employer vests RSUs, it (or its broker) may withhold US tax on the value and report it on IRS Form 1042-S — the default NRA withholding is 30%, reducible to a treaty rate for Indian residents. In the Indian ITR, you (1) declare the vest value as salary/perquisite, (2) claim a foreign tax credit (FTC) in Schedule TR under s.90 ITA 1961 and Form 67 (Rule 128), and (3) take the credit limited to the lower of the Indian tax or the foreign tax attributable to that income. Form 67 must be filed on or before the ITR due date — filing it late forfeits the credit.
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What the 1042-S tells you
If no tax was withheld (a common outcome when a valid W-8BEN claims the India-US DTAA), there is no credit to claim — but the income is still taxable in India.
How the credit is computed
FTC = lower of (foreign tax paid on the income, Indian tax attributable to the same income).
- Foreign tax = the US federal tax withheld and reported on 1042-S, converted to INR. State tax is generally not creditable.
- Indian tax attributable = Indian tax on total income × (foreign income ÷ total income) — a proportionate share.
Worked example: Rohan's 1042-S credit
Persona: Rohan, Indian resident, 100 RSUs vest on 10 September 2025. FMV at vest $40; FX ₹84 → perquisite ₹3,36,000. The broker's system treated the vest as a dividend-equivalent and withheld 15% under DTAA Article 10 (portfolio dividends) = $600 = ₹50,400, reported on Form 1042-S. Rohan's slab rate is 30%. This is a broker mismatch, not a correct treaty position — RSU vest is employment income under DTAA Article 15, where India has the exclusive taxing right on a resident employee's income earned for services rendered in India, so the correct US withholding on the vest is nil. The mismatch means Rohan's real remedy is an IRS refund / 1042-S correction. The example below assumes an Indian AO accepts the withheld amount as a Rule 128 credit only after Rohan documents the mismatch — verify with the CA before claiming.
Step 1 — Declare the perquisite: ₹3,36,000 added to salary in the ITR (FY 2025-26).
Step 2 — Indian tax on the perquisite: ₹3,36,000 × 30% = ₹1,00,800 (illustrative, before exemptions/rebates).
Step 3 — FTC: lower of foreign tax ₹50,400 and Indian tax ₹1,00,800 = ₹50,400.
Step 4 — File Form 67 (e-portal → Form 67) with country "United States," income type "salary/perquisite," foreign income ₹3,36,000, foreign tax ₹50,400, and the DTAA article — before the ITR due date.
Step 5 — Claim in Schedule TR of the ITR: foreign income and the ₹50,400 credit, against the Article invoked.
Result: Rohan's Indian tax on the perquisite drops from ₹1,00,800 to ₹50,400 income-tax net, PLUS 4% health & education cess (Rule 128(4) does not credit HEC — cess is charged on the pre-credit tax figure, so the true out-of-pocket is roughly ₹50,400 + ₹4,032 cess = ₹54,432), before other credits. If he had missed the Form 67 deadline, the credit is at risk — the Department and some ITAT benches treat late Form 67 as fatal; other benches have allowed it on facts. File before the s.139(1) due date.
The treaty-article mismatch you may face
India taxes RSU vest value as employment income (s.17(2)(vi), DTAA Article 15 — Dependent Personal Services). The US broker may have reported it as a "dividend-equivalent" and withheld at 30% (or 15% treaty dividend rate under Article 10) because the broker's systems do not recognise RSU compensation. The result: tax withheld on the wrong treaty article. This mismatch must be documented — keep the 1042-S, the W-8BEN, and the vest statement, and have your CA determine whether the full withheld amount is creditable or whether a US refund claim (Form 1040-X or a 1042-S correction) is needed. — the treatment depends on the exact facts and the DTAA article applicable to RSU compensation.
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Why withholding may be zero
A missing 1042-S is not a mistake — it is often the intended outcome. When you file a valid W-8BEN claiming the India-US DTAA, the US payer can reduce or eliminate withholding on the vest value. Many Indian residents receive their RSU vests with zero US tax withheld precisely because the treaty was applied correctly. The consequence in India: there is no foreign tax credit to claim, but the vest value is still fully taxable as salary income in India. Do not read "no withholding" as "not taxable." The perquisite enters salary, employer TDS (if any) applies, and the ITR must show the full FMV at vest.
What if you never received a 1042-S?
If the US withheld tax but no 1042-S arrived, the credit is not lost — it is just harder to prove. Ask payroll or the broker (ETRADE/Schwab/Fidelity) for a reprint, and check the brokerage tax-documents section for the year. As a fallback, gather the vest statement, the W-8BEN, and any payroll record of the withholding, and have your CA assess whether the credit is supportable under Rule 128. A 1042-S is the clean evidence, but the tax paid* is the substantive requirement for the foreign tax credit — file Form 67 on the strength of the best available documentation before the ITR due date.
Frequently Asked Questions
1. What is Form 1042-S in the context of RSUs?
The IRS form that reports US-source income paid to a non-resident alien (your RSU vest value) and the US tax withheld. It is the primary evidence of foreign tax paid for the Indian FTC.
2. What rate does the US withhold on RSU vest?
The default NRA rate is 30%. With a valid W-8BEN claiming the India-US DTAA, it can be reduced or eliminated, depending on how the income is classified (compensation vs dividend-equivalent).
3. Where do I claim the foreign tax credit in the Indian ITR?
In Schedule TR (relief under s.90), backed by Form 67 filed on the portal before the ITR due date. The credit is the lower of the foreign tax paid and the Indian tax attributable to the same income.
4. Can I claim credit for US state tax withheld on RSUs?
Generally no — only qualifying foreign tax attributable to the income is creditable under Rule 128; state tax is usually excluded. for your facts.
5. What if the US withheld 30% but India treats the income as salary?
This is the treaty-article mismatch: the withholding was classified (e.g., as dividend-equivalent) differently from India's salary treatment. Document the 1042-S, W-8BEN and vest statement, and confirm with your CA whether the full amount is creditable or needs a US correction/refund claim.
6. When must Form 67 be filed?
On or before the ITR due date. The Department and several ITAT decisions treat a late Form 67 as fatal to the FTC — but a number of other ITAT benches have read Rule 128(9) as directory and allowed the credit on facts. The prudent course is to file Form 67 electronically before submitting the ITR; if it's late, get CA advice on the current caselaw before assuming the credit is lost.
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Reconcile your 1042-S before filing
Use the Foreign RSU Calculator to convert the 1042-S figures to INR, compute the FTC cap, and prepare the numbers for Schedule TR and Form 67 — then file Form 67 first.
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Last verified: 2026-08-08.
Sources: Sections 90, 17(2)(vi) ITA 1961; Income-tax Rules, 1962 (Rule 128, Form 67); India-US DTAA (Arts. 10, 15); IRS Form 1042-S / W-8BEN.
Reviewer: pending CA sign-off. Draft status — do not publish before CA review.: creditable US tax types; treaty-article treatment of RSU compensation.
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See Also
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