Land‐use changes such as conversion of natural forest to rural and urban areas have been considered as main drivers of ecosystem functions decline, and a large variety of indicators has been used to investigate these effects. Here, we used a replicated litter‐bag experiment to investigate the effects of land‐use changes on the leaf‐litter breakdown process and leaf‐associated invertebrates along the forest–pasture–urban gradient located in a subtropical island (Florianópolis, SC, Brazil). We identified the invertebrates and measured the litter breakdown rates using the litter bags approach. Litter bags containing 3 g of dry leaf of Alchornea triplinervia were deployed on forest rural and urban streams. Principal component analysis, based on physico‐chemical variables which, confirmed a gradient of degradation from forest to urban streams with intermediate values in rural areas. In accordance, shredder richness and abundance were lower in rural and urban than in forest streams. The land‐use changes led also to the dominance of tolerant generalist taxa (Chironomidae and Oligochaeta) reducing the taxonomic and functional diversity in these sites. Leaf‐litter breakdown rates decreased from forest to rural and finally to urban areas and were associated with changes in pH, water velocity, dissolved oxygen and abundance of leaf‐shredding invertebrates, although global decomposition rates did not differ between rural and urban streams. Overall, this study showed that land‐use changes, namely to rural and urban areas, have a strong impact on tropical streams ecosystems, in both processes and communities composition and structure. Despite of being apparently a smaller transformation of landscape, rural land use is comparable to urbanisation in terms of impact in stream functioning. It is thus critical to carefully plan urban development and maintain forest areas in the island of Florianópolis in order to preserve its natural biodiversity and aquatic ecosystems functioning.