Dividends vs Capital Gains: Comparison Chart, Taxation & Examples
Understanding the difference between dividends and capital gains is vital in commerce, especially for exams and smart investing. These two concepts help students answer critical questions in financial management, accounting, and help in making informed business or personal finance decisions.
| Basis of Difference | Dividends | Capital Gains |
|---|---|---|
| Meaning | Regular payments to shareholders from a company’s profits. | Profit earned by selling an investment asset at a higher price than its purchase price. |
| Source | Distributed from company’s current or retained profits. | Arises due to an increase in the value of an asset, realized on sale. |
| Frequency | Usually periodic (quarterly, annually, etc.). | Occurs only on sale or transfer of the asset. |
| Tax Treatment | Taxed as dividend income (in India, usually taxable in shareholders’ hands). | Taxed as short-term or long-term capital gain, depending on holding period. |
| Realization | Received without selling the investment. | Requires sale/disposal of the asset. |
| Effect on Company | Assets/cash outflow from the company’s reserves. | No direct outflow from the company concerned. |
Dividends: Definition and Importance
A dividend is the portion of company profits distributed to its shareholders. Companies may pay dividends in cash or additional shares. Dividends offer regular, often predictable, income—making them attractive to investors who prefer steady returns and lower risk. At Vedantu, we simplify such company-related concepts for easier exam prep.
Capital Gains: Meaning and Relevance
Capital gains arise when an investor sells an asset, such as shares or property, for more than its purchase price. This gain is only realised on the sale. Capital gains can be short-term (asset held ≤12 months) or long-term (asset held >12 months). This concept is key in investment decisions and wealth creation, frequently appearing in school and competitive exams.
Taxation on Dividends and Capital Gains
Both dividends and capital gains have specific tax rules, which regularly feature in financial management questions:
- Dividends: In India, as of FY 2023-24, dividends are added to your total income and taxed at your applicable slab rate.
- Capital Gains: Taxed based on asset holding period. Short-term gains (usually <12 months for shares) are taxed at 15%. Long-term gains (held >12 months) are typically taxed at 10% (above Rs. 1 lakh), with special provisions for different assets.
Real-Life Examples of Dividends and Capital Gains
- Dividend Example: Riya owns 100 shares of a company. The company announces a dividend of Rs. 10/share. Riya receives Rs. 1,000 as dividend in her account, even though she does not sell her shares.
- Capital Gain Example: Aarav buys 50 shares at Rs. 200 each (total Rs. 10,000). After one year, he sells all for Rs. 300 each (total Rs. 15,000). His capital gain is Rs. 5,000.
Common Student Confusions Explained
- Dividend income and capital gains are not the same. Dividends are regular payouts; capital gains require selling the asset.
- You can receive dividends multiple times while holding an asset, but capital gain is only realised upon sale.
- Both are types of investment returns but taxed differently and shown separately in financial statements.
- Not all shares pay dividends, but most can generate capital gains if their price rises.
Difference Between Dividends and Capital Gains for Exams
Exam papers often ask “difference between dividends and capital gains in tabular form”—the table above is the standard format. Focus on basis, source, frequency, and realisation for full marks.
Why Learning This Helps Students
Understanding the difference aids in writing accurate exam answers and helps future investors make smart choices. These concepts are important in financial markets, company accounts, and business planning. Knowledge of taxation and returns improves real-world financial literacy—a key goal for students and future entrepreneurs.
Page Summary
Dividends and capital gains are essential investment returns. Dividends provide regular income to shareholders, while capital gains reward those who sell assets at a profit. Mastering their differences—especially for tax, frequency, and exam tables—ensures you can answer school questions and navigate real-world investment scenarios confidently with Vedantu’s resources.
FAQs on Difference Between Dividends and Capital Gains
1. What is the main difference between dividends and capital gains?
Dividends are regular payments from company profits to shareholders, while capital gains are profits from selling an investment for more than its purchase price. Dividends represent periodic income, whereas capital gains are profits realized upon asset sale.
2. Are dividends taxable?
Yes, dividends are generally taxable as income. The specific tax rates vary depending on factors like the investor's income bracket and the type of dividend (e.g., qualified dividends may have different tax treatment).
3. Is a dividend considered as a capital gain?
No, a dividend is not considered a capital gain. Dividends are payments from a company's earnings, while capital gains result from the sale of an asset at a profit. They are taxed differently.
4. Which is better for investors: dividends or capital gains?
There's no universally 'better' option; it depends on individual investment goals and risk tolerance. Dividends offer regular income, while capital gains provide potential for higher returns but with greater risk. A balanced portfolio might include both.
5. How are capital gains and dividends taxed?
Capital gains taxes depend on the holding period (short-term or long-term) and the applicable tax rates. Dividend tax rates depend on factors like the investor's income and the type of dividend. Tax laws vary by jurisdiction.
6. What is the difference between a dividend and a capital gain?
A dividend is a payment from a company's profits to its shareholders, while a capital gain is the profit made from selling an asset at a higher price than its purchase price. Dividends are regular income streams, and capital gains are realized upon sale.
7. Are dividends or capital gains better?
The preference between dividends and capital gains depends on your investment strategy. Dividends offer consistent income, while capital gains hold the potential for larger returns but involve higher risk. A well-diversified portfolio often balances both.
8. What is the difference between capital stock and dividends?
Capital stock represents the ownership shares of a company, while dividends are payments made from company profits to the owners (shareholders) of that capital stock. Owning capital stock entitles you to potential dividends and capital gains.
9. How do mutual funds distribute dividends vs capital gains?
Mutual funds distribute both dividends (from the underlying investments) and capital gains (from selling assets within the fund). The frequency and proportions vary based on the fund's investment strategy and market conditions. Investors receive distributions periodically.
10. Can a company pay dividends if it has no profits?
Generally, no. Companies usually pay dividends from their accumulated profits or retained earnings. Paying dividends when unprofitable can lead to financial instability and is generally avoided. Exceptions might exist under specific circumstances, but they are rare.
11. What factors influence a company's dividend policy compared to capital appreciation?
Several factors influence a company's choice between dividend payouts and reinvesting profits for capital appreciation. These include the company's profitability, growth opportunities, debt levels, tax implications for shareholders, and overall financial health. Management's strategy plays a key role.
12. Are reinvested dividends counted as new capital for capital gains calculation?
Yes, when dividends are reinvested, they increase the investor's cost basis (the original investment amount). This higher cost basis subsequently affects the capital gains calculation when the investment is eventually sold, reducing the taxable gain.
