The Key Difference Between Dividends and Capital Gains

dividends vs capital gains
Feature	Dividends	Capital Gains
Definition	A portion of a company's profit distributed to shareholders.	Profit earned by selling an asset at a higher price than the purchase cost.
Source	Comes from company’s retained earnings.	Comes from appreciation in asset value.
Timing	Received periodically (quarterly, annually) if declared by the company.	Realized only when the asset is sold.
Form	Paid in cash or additional shares.	Earned as profit upon sale of securities or property.
Control	Investor has no control; depends on company’s dividend policy.	Investor controls when to sell and realize the gain.
Occurrence	Can occur even if the stock price doesn’t rise.	Only occurs if the investment grows in value and is sold.
Stability	Can be regular and predictable in mature companies.	Uncertain; depends on market conditions and investment choices.
Taxation (India)	Taxed as income based on the individual’s slab (if above ₹5,000/year from a company).	Taxed as short-term or long-term capital gains depending on holding period.
Holding Period	No minimum holding required to receive dividends (if record date is met).	Gains depend on how long the asset is held (for tax classification).
Return Type	Regular income stream.	Lump sum profit at the time of sale.
Company’s Role	Initiated and declared by the company’s board.	No company involvement; purely investor-driven.
Market Impact	Stock price may fall by dividend amount post declaration.	Capital gains reflect the overall market or asset performance.
Investor Preference	Preferred by income-focused and retired investors.	Preferred by growth-focused and long-term investors.
Reinvestment	Can be reinvested through dividend reinvestment plans (if available).	Capital gains can be reinvested in any asset post sale.
Dependability	More dependable in blue-chip or dividend-paying stocks.	Less predictable; subject to price fluctuations and timing.
Impact on Holding	Investor continues holding the asset post-dividend.	Holding reduces or ends after selling the asset.
Example	Receiving ₹10/share dividend from Infosys.	Selling HDFC shares bought at ₹2,000 for ₹2,400 (₹400 capital gain).
Tax Efficiency	May be less tax-efficient if in higher income bracket.	More tax-efficient for long-term holdings (under LTCG rules).
Cash Flow	Provides passive income.	One-time cash flow event.
Visibility	Announced in advance; predictable if consistent.	Depends on investor’s action; timing is uncertain.
Record Date	Investor must hold stock on the record date to be eligible.	No record date; gain based solely on buy/sell transactions.