Overview: Capital gains and Dividend Income
Both capital gains and dividend income (comes under other investment income) are a source of profit. They both hold potential tax outcome. They are two different forms of income made by any investment in the Real estate (Capital gains) or Stocks (Dividends). In terms of finances and taxes, both words have a different meaning.
Capital gains: It is a rise in the value of the investment or real estate, which gives it a higher worth than the purchase price. An investor cannot realize the gain until he sells the asset for a profit.
Dividend Income:It is a portion of the asset of an organization. The shareholders receive the equal distribution as a reward.
Other key differences:
1) Capital gain is the profit which occurs after selling off a long-term asset at a higher price than the purchase price, whereas dividend is the income for the stakeholders received from the earnings of a company.
2) For capital gains, you will have to convert your shares/assets into cash, whereas dividends provide a periodic income that remains steady.
3) The beneficiaries have restrictions in terms of capital gain. Mostly owners or investors that are very less in number. Whereas the beneficiaries of dividends depend on the number of shares issued, which are generally abundant in number.
4) The taxes imposed on Capital gains are different; it depends upon the duration that is whether it is long-term or short-term, whereas dividend charge is at a flat rate.
5) Capital gains occur once in a lifetime, whereas dividend distribution depends on the senior management of the company.
6) Since the capital gain is a long-term asset, it is generally on an increasing trend whereas dividends are inconsistent that depend on the decisions of the management and performance of the company.
7) The timing and the amount of profit rest in the hands of the owners/investors for capital gain. In dividends, no shareholder has the authority to decide on the realization of the profit. The distribution of the benefit is done by senior management.
8) In capital gain, there are no compensations. It means it does not offer anything additional except the gain from the fluctuations of the value of shares. Dividends provide more than merely giving part of profit like bonus shares and stock split.
By going through the given example you will have a clear idea of what Capital gains and Dividend Income means.
If a property is purchased at for INR 10,00,000 and sold for INR 18,00,000, then the amount of capital gains will be ( INR 18,00,000-INR 10,00,000 = INR 8,00,000). The taxation amount on the same will vary upon on time. Let say, if the asset has been sold after three years at a tax rate of 10%, then the taxable amount will be (10%*8,00,000 = 80,000).
If an organization declares dividends @ INR 2.0 per share, then it will be multiplied by the number of shares held. If Mr. X owns ten shares of the organization, then he will receive a dividend of 10*INR 2.0 = INR 20.