Azo dyes account for >70% of the global industrial demand (∼9 million tons). Owing to their genotoxic/carcinogenic potential, the annual disposal of ∼4,500,000 tons of dyes and/or degraded products is an environmental and socio-economic concern. In comparison to physico-chemical methods, microbe-mediated dye degradation is considered to be low-input, cost-effective and environmentally-safe. However, under different environmental conditions, interactions of chemically diverse dyes with metabolically diverse microbes produce metabolites of varying toxicity. In addition, majority of studies on microbial dye-degradation focus on decolorization with least attention towards detoxification. Therefore, the environmental significance of microbial dye detoxification research of past >3 decades is critically evaluated with reference to dye structure and the possible influence of microbial interactions in different environments. In the absence of ecosystem-based studies, the results of laboratory-based studies on dye degradation, metabolite production and their genotoxic impact on model organisms are used to predict the possible fate and consequences of azo dyes/metabolites in the environment. In such studies, the predominance of fewer numbers of toxicological assays that too at lower levels of biological organization (molecular/cellular/organismic) suggests its limited ecological significance. Based on critical evaluation of these studies the recommendations on inclusion of multilevel approach (assessment at multiple levels of biological organization), multispecies microcosm approach and native species approach in conjunction with identification of dye metabolites have been made for future studies. Such studies will bridge the gap between the fundamental knowledge on dye-microbe-environment interactions and its application to combat dye-induced environmental toxicity. Thus an environmental perspective on dye toxicity in the background of dye structure and effects of environmental processes has been developed. Based on past 3 decades of research on microbial dye detoxification, the current state of knowledge has been analyzed, environmental relevance of these studies was ascertained, research gaps in microbe-mediated azo dye detoxification have been identified and a research framework emphasizing a better understanding of complex interactions between dye-microbe and environmental processes has been proposed. It provides directions for undertaking environmentally sound microbial dye detoxification research.