Financial inclusion, defined as easy, affordable, and broad access of economic agents to formal financial services, plays an important role in improving income distribution through its effects on saving, borrowing, investment, and economic participation. Given the importance of the issue, the present study investigates the impact of financial inclusion on income inequality in urban and rural areas of the country over the period 2013–2021. To analyze the relationships between the variables, provincial data of Iran with an annual frequency and the panel Generalized Method of Moments approach have been employed. The findings indicate that financial inclusion has a negative and statistically significant effect on income inequality in both urban and rural areas of the country. This finding suggests that expanding access to formal financial services, on the one hand, leads to increased investment and the expansion of entrepreneurial activities by facilitating households' and firms' access to financial credit. Subsequently, it facilitates improved employment opportunities and increased income among low-income groups. On the other hand, the extension of access to formal financial services reinforces the participation of underprivileged groups in financial markets by reducing information asymmetry, decreasing transaction costs, and improving financial literacy. Consequently, financial inclusion contributes to narrowing the income gap through improving economic opportunities and enhancing the income-generating capacity of low-income groups. In addition, the results reveal that economic growth, government size, and inflation exert positive, statistically significant impacts on income inequality in urban and rural areas of Iran. Therefore, the expansion of financial inclusion can be considered an effective policy instrument for promoting distributive justice and reducing income inequality.