Institutional role to perpetuate the smooth and sustained functioning of economies has consensus in literature but the optimal level of institutional quality for prosperity is hardly discussed. On the other side, widening income inequality is attracting the attention of worldwide researchers now days. This paper is an attempt to explore the relation between income inequality and financial development varying with level of institutional quality. To this end, unbalanced panel data set for 124 countries covering the time span 1990-2015 is used and the instrumental variable threshold regression approach is applied to prove that a threshold level of institutional quality matters to reduce income inequality through financial development. Until then, financial development will be ineffective to overcome income inequality.