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This study was aimed to investigate the determinants of income inequality among Urban households of Nekemte Town of Ethiopia by decomposing it across subgroups of the population. Accordingly, 275 households have been drawn using a stratified sampling method, while kebele (smallest administrative unit) has been taken as a stratum. Household expenditure per adult equivalent was used as a proxy for income inequality. Inequality situation and decomposition analysis by population subgroups were performed using Distributive Analysis Stata Package (DASP) to within and between subgroups components inequality relative contribution. Furthermore, Ordinary Least Square (OLS) and Quintile Regression (QR) Models were applied for econometric analysis. High inequality relative contribution was due to the 'between subgroups inequality relative contribution' of housing condition subgroups, education levels, age, family size and occupational types of subgroups, respectively. Likewise, high inequality relative contribution was due to 'the within subgroups inequality relative contribution' of marital status, gender and remittance of subgroups, respectively. On the other hand, the QRM result confirmed that age, gender, education level, marital status, family size, dependency, occupation, housing condition and remittances were the major determinants of income inequality in the study area. The implication is that government and development actors need to intervene through family planning, empowerment of women in productive activities, providing better quality and access to higher education, ensuring better access to housing infrastructure and transforming self-employment to address the causes of income inequality in the study area.

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