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Our Upanishads talk about four different states, out of which the two are:

Waking state, which basically is the reality experienced externally in the outer world and Dreaming state, which basically is the reality experienced internally in the inner world, it is real and it is an experience of the subtle world, the inner world of imagination and thoughts.

But my question is:

Is there any link between the two states in any sense, something that connects the two states, coz normally what we experience externally is usually different from what we experience internally. But as per the Upanishads both are realities.

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They are both apparent realities experienced. The 'link' between the two states is the perceiver. The perciever experiences, is presented, with each state separately, the perceiver does not, cannot, experience both states at the same time. The perceiver is only aware of mental states. The Mandukya Upanishad IV says (The Upanishads: A New Translation by Swami Nikhilananda):

The second quarter (pada) is Taijasa, whose sphere of activity is the dream state, who is conscious of internal objects, who is endowed with seven limbs and nineteen mouths, and who is the experiencer of subtle objects.

And in his commentary on this verse, Nikhilananda writes:

INTERNAL: In dreams mental states consisting of the impressions of the waking state are experienced. During the dream state the sleeping man is aware of the external world and internal ideas. But when he awakes and reviews the dream experiences, he comes to realize that they were nothing but the internal activity of the mind. When a man is asleep his sense-organs are inactive. Therefore the dream experiences cannot but be mental states.

...SUBTLE OBJECTS: In the waking state one's consciousness is associated with gross objects, wheras in the dream state one sees the impressions of past experiences. But in reality the experiences of waking and dream are of the same nature; for in both states the perceiver is aware only of his mental states. [the link] From the standpoint of dreams, the dream objects are as gross and physical as those experienced in the waking state. It is from the standpoint of waking alone that one infers that the dream objects subtle, insomuch as in the dream state no gross object exists for the dreamer.

[and further in his adaption of Shankara's commentary] "Then [when he falls asleep] after having taken away with him [a portion of the] impressions from the world of the waking state, [destroying and building up again] he experiences dreams by his own light." Brhadaranyaka Upanishad IV. iii. 9.

  • When we say "wheras in the dream state one sees the impressions of past experiences" the past experiences are of current life or all the previous lives? Coz at times we dream of people from current life but many times they are all unknown people. – Just_Do_It Jun 28 at 12:05
  • @Just_Do_It sometimes dreams can reflect past life if ones Pineal Gland is naturally strong based on position of moon in ones Astrology chart. Moon is related to mind and all storages of past lives are there in Pineal gland. – Parabrahman Jyoti Jun 28 at 15:33
  • @Just_Do_It For most people in most instances, it is only of the current life. Memories reside in the brain, and, as such, are destroyed with the destruction of the body (annamayakosa). The vast majority of people only experience memories of the current life. Again, there are always exceptions. – Swami Vishwananda Jun 29 at 6:25
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Swapna (dreams) are a method by which Bhagavan decreases your karma (whether punya(virtue) or paap(sin)).

When you do a big bad deed, like stealing, your paap karma gets reduced when you are punished for it by being put in jail.
When you do a small bad deed, like fantasize about stealing, your paap karma gets reduced when you are punished for it by getting a dream about being put in jail.

Similarly for big good deeds, and small good deeds - becoming rich vs. dream of becoming rich.

So, your waking-state karma results in either waking-state phala or dream-state phala.

Source - Brahma-Sutra 3.2.1 & Srimad Bhagavatam 6.16.53-54

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