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Pastoralism is the predominant livelihood in Banni grasslands. However, combination of factors (livestock population pressure, overgrazing, severe droughts, rapid invasion of P. juliflora) has led to severe degradation of the grasslands. This has increased the risk of pastoralism as a profitable and sustainable livelihood. In this context, this socio-economic study investigated the livelihood diversification process adopted by pastoralists in Banni grasslands. Primary data were collected from 280 households from 13 villages using stratified random sampling technique. Out of these, detailed livelihood diversification analysis of 50 households (case studies) was undertaken. Results found that pastoralists diversified into combination of eight non-pastoralism based livelihood options (charcoal production, labour, services, leather work, embroidery work, honey & gum collection, tourism and trade) for livelihood security. Based on the combination of pastoralism and other income generating activities, there were eight different household typologies in the region viz., (i) Buffalo rearing + 7 activities (66%); (ii) Buffalo & Goat rearing + 1 activity (4%); (iii) Buffalo + Cow rearing + 3 activities (4%); (iv) Cow rearing + 2 activities (4%); (v) Camel rearing + No additional activity (2%); (vi) Sheep & Goat rearing + 1 activity (4%); (vii) Goat rearing + 5 activities (12%); and (viii) 5 activities without any livestock (6%). The adaptation strategies of pastoralists to degradation of Banni were reduced dependency on pastoralism (reduction in herd size of buffaloes, moving out of buffalo rearing, goat rearing in small herds) and diversification into non-pastoralism based livelihood options. Buffalo rearing households earned highest annual income. Goat rearing and livestock-less households were the poorest. It indicated that moving out of pastoralism (even after income diversification efforts) was associated with low incomes. Therefore, increasing the carrying capacity of the grasslands through scientific management and development of supply and value chain are the most sustainable options for risk reduction and enhancing income of households.