In recent years, with the rapid popularization of digital technology, digital literacy has become an important new human capital in the digital era, empowering traditional human capital and production and life. In this context, rural household income is closely related to digital literacy. However, existing literature lacks a thorough understanding of farmers’ income from the perspective of digital literacy, particularly the deeper research on how digital literacy affects different types of farm household income and the differential impact of digital literacy on the income of farm households with different household endowments. Using data from the 2020 China Rural Revitalization Survey (CRRS), this paper constructs an index system of digital literacy based on the approach proposed by Su Lanlan et al. (2022) and the EU Digital Competence Framework for Citizens version 2.2 released by the European Union (2022). The index system of digital literacy comprehensively considers aspects such as the accessibility of digital devices and motivation and behaviors for digital technology utilization. The study examines the impact and mechanisms of digital literacy on different types of farmers’ income. Empirical research finds that digital literacy can significantly improve the income levels of rural households, and the regression results remain robust after considering adjustments of the sample scope, variable substitutions, and endogeneity issues. Mechanism analysis shows that digital literacy can increase farmers’ agricultural income by improving their labor productivity and can also increase their non-agricultural income by promoting the diversification of farmers’ livelihoods, thereby positively impacting the total income of farmers. The mediation effects are tested using the Sobel test and Bootstrap method, and the conclusion remains valid. Further analysis indicates that digital literacy has a more significant effect on increasing agricultural and non-agricultural incomes for rural households constrained by mobility and located in non-suburban villages, and the robustness of the conclusion is verified using inter-group coefficient difference tests. Compared with the existing literature, this paper makes two main extensions: Firstly, unlike previous studies that mainly analyze the impact of the digital economy on farmers’ income from a macro perspective, this paper explores the theoretical mechanisms through which digital literacy affects farmers’ income from a micro perspective using CRRS household questionnaire data, expanding the literature on factors influencing farmers’ income and holding significant practical implications for bridging the digital divide and unlocking digital dividends; Secondly, departing from the emphasis of previous digital literacy research on theoretical analysis and education, this paper constructs a digital literacy index system at the rural household level, empirically analyzes the impact and mechanisms of digital literacy on different types of income, and further explores the influence of digital literacy on farmers’ income with different characteristics based on the heterogeneity of household endowment, providing more specific evidence for existing aggregate studies. This study, to some extent, reveals the inherent logic between digital literacy and rural household income, provides empirical evidence for the income growth effect of digital literacy and its operating mechanisms, helps government departments formulate more targeted policy measures for “increasing rural household income” under the goal of “common prosperity”, provides differentiated policy support for rural households with different characteristics to increase income, and better guides rural households to achieve income growth.