Rural-urban classification constitutes an important framework for the collection and compilation of population data in many countries. While “urban” is often specifically defined, “rural” is treated simply as a residual category. The criteria defining urban also differ from country to country. This paper argues that these rural and urban statistical categories are also highly significant for local governance, increasingly so in recent years given the emphasis on local governance and its restructuring. In India, constitutional amendments have given constitutional status to local bodies in the federal structure of the country. Local bodies are thus now expected to draw up their own plans and initiate development works, which requires them to generate their own resources and lessen their dependence on central government funding. It is thus necessary to reorganize urban space into viable spatial units in terms of their revenue base. While rural-urban classification is the task of the Census of India, state governments are responsible for granting municipal status to urban centres. This paper examines the criteria and limitations of the rural-urban classification followed by the Census, its congruence with the dynamics of state-accorded municipal/non-municipal status and some implications for municipal governance in India.