Nah, it's a legitimate question if you've never done it before. Anyone who roasts you for the question isn't worth paying attention to anyway.
It's pretty simple, in and upgrade you install over the top of your existing OS. All the programs and all your data is still there. Trouble is, as I said in a post above, these never seem to go well. There's all kinds of crap that's carried over and doesn't get purged and although the software manufacturer wanted it to be seamless, it almost never is.
On a clean install, you make sure all your data is backed up elsewhere, completely wipe the hard drive and do a "fresh" install.
Yeah. Everything's gone. But there are a couple of options (and I'd suggest checking a few online guides because I haven't done all these personally):
1. The method for the guy who has too much time on his hands (like me): Get ANOTHER hard drive aside from your time machine volume and user a program like SuperDuper! to make a perfect clone of your existing drive. Wipe your machine's drive clean, install the OS, recreate your user account manually as if it were a new user and then manually reinstall all your software and manually copy over stuff from your Library folder as you need it. This method is time consuming and a pain. But it'll bring with it the least amount of legacy rubbish. (And admittedly, it's probably overkill. But there were some reports of Apple Mail having issues when bringing over previous settings. I set my accounts up manually and Mail has been better than I ever remember it.)
2. The next method (which I just did on my dad's MacBook Pro) is, once the new OS is installed and you've restarted, the "Migration Assistant." You have a bunch of different options here. It'll ask if you want to migrate data from another Mac, another volume (a cloned hard drive like mine) or a time machine volume. Pick any and it'll give you particular instructions on what to do. Once you select a volume it'll ask you what you want to transfer:
A. User Files
B. Applications
C. Other System Files
D. Other (which was like 8gigs worth of crap when I did this with my dad's machine.)
I checked A and B and everything seems to have gone smoothly.
I don't know precisely how this all ties together with time capsule since all my time machine volumes are simply on USB HDs. But I'm sure it's pretty much the same.