Diarrhoeal disease is one of the major causes of morbidity and mortality in children and is usually measured at individual level. Shared household attributes, such as improved water supply and sanitation, expose those living in the same household to these same risk factors for diarrhoea. The occurrence of diarrhoea in two or more children in the same household is termed ‘diarrhoea clustering’. The aim of this study was to examine the role of improved water supply and sanitation in the occurrence of diarrhoea, and the clustering of diarrhoea in households, among under-five children in India. Data were taken from the fourth round of the National Family and Health Survey (NFHS-4), a nationally representative survey which interviewed 699,686 women from 601,509 households in the country. If any child was reported to have diarrhoea in a household in the 2 weeks preceding the survey, the household was designated a diarrhoeal household. Household clustering of diarrhoea was defined the occurrence of diarrhoea in more than one child in households with two or more children. The analysis was done at the household level separately for diarrhoeal households and clustering of diarrhoea in households. The presence of clustering was tested using a chi-squared test. The overall prevalences of diarrhoea and clustering of diarrhoea were examined using exogenous variables. Odds ratios, standardized to allow comparison across categories, were computed. The household prevalence of diarrhoea was 12% and that of clustering of diarrhoea was 2.4%. About 6.5% of households contributed 12.6% of the total diarrhoeal cases. Access to safe water and sanitation was shown to have a great impact on reducing diarrhoeal prevalence and clustering across different household groups. Safe water alone had a greater impact on reducing the prevalence in the absence of improved sanitation when compared with the presence of improved sanitation. It may be possible to reduce the prevalence of diarrhoea in households by targeting those households with more than one child in the under-five age group with the provision of safe water and improved sanitation.