The article tries to compare urban and rural literacy of fifteen selected Indian states during 1981 - 2011 and explores the instruments which can reduce the disparity in urban and rural educational attainment. The study constructs the Sopher’s urban-rural differential literacy index to analyze the trends of literacy disparity across fifteen states in India over time. Although literacy disparity has decreased over time, Sopher’s index shows that the states of Andhra Pradesh, Madhya Pradesh, Gujarat, Odisha, Maharashtra and even Karnataka faced high inequality in education between urban and rural India in 2011. Additionally, the Fixed Effect panel data regression technique has been applied in the study to identify the factors which influence urban-rural inequality in education. The model shows that the following factors can reduce literacy disparity between urban and rural areas of India: low fertility rate in rural women, higher percentages of rural females marrying after the age of 21 years, mother’s educational attainment and their labour force participation rate in rural areas.