Abstract: Based on the provincial panel dataset, this paper firstly examines China income inequality and its evolution process by means of Theil indexes, and followed by decomposition of income inequality according to the regional structure and urban-rural structure. The result shows that urban-rural income inequality occupies the biggest share of income inequality in China, which account for 70% of the overall income inequality. Intra-Regional income disparities are more significant than inter-regional. In addition to following the common economic law, China’s income inequality is affected largely by economic policy. This paper also offers a proposal to speed up economy development and insist rural–preferential economic policy in order to alleviate the income inequality.