This study attempts to measure the income diversification among different sections of rural households based on the data collected from three villages of K V Kuppam Block in Vellore district of Tamil Nadu. Income diversification was measured by Simpson index and the prominent factors that determine income diversification were identified by using the OLS regression. It is argued that there is a significant difference in the income diversification among different groups of rural households with respect to their major income source, total income, per capita income and landholdings. But, the difference in income diversification is not significant with respect to the community they belong. Assets such as cultivating land and cattle determine the income diversification. Household demographic characters like gender composition of the household, sex and age of the head of the household and the number of workers in the household influence income diversification.

There is now a growing recognition that rural households construct a diverse portfolio of activities in order to generate income and the non-agricultural sector contributes a substantial portion of the rural household income. Reardon et al. (1998) find an average share of 42% of non-farm income in the total rural household income in Africa, 40% in Latin America and 32% in Asia. Rural households can generate income from a wide range of farm and non-farm activities apart from remittances and social support capabilities. Each household has its own decision-making strategy on allocation of resources among the different income-generation activities. Household members can engage in different activities to generate income. Sometimes a member finds multiple sources of income in a particular time or different times of the year. Diverse livelihood systems are less vulnerable to natural calamities, market fluctuations, risk, and poverty than non-diversified livelihoods (Reardon et al., 1992; and Hart Gillian, 1994) and sustained flow of income usually requires diversified economic activity.