Microbes have potential to convert non-toxic azo dyes into hazardous products in the environment. However, the role of microbes in biotransforming such presumably non-toxic dyes has not been given proper attention, thereby, questions the environmental safety of such compounds. The present study assessed salinity driven microbial degradation of an unregulated azo dye, Acid orange 7 (AO7), under moderately halophilic conditions of textile effluent. The halophilic microbial consortium from effluent decolorized ~97% AO7 (50–500 mg L−1). The consortium efficiently decolorized the dye at different pH (5–8) and salinity (5–18% NaCl). The 16S rRNA sequence analyses confirmed the presence of Halomonas and Escherichia in the consortium. The FTIR and GC-MS analyses suggested microbial consortium degrade AO7 following symmetric and asymmetric cleavage and yield carcinogenic/mutagenic aromatic byproducts viz. aniline, 1-amino-2-naphthol, naphthalene, and phenyldiazene. In contrast to AO7, the biodegraded products caused molecular, cellular and organism level toxicity. The degraded products significantly reduced: radicle length in root elongation assay; shoot length/biomass in plant growth assays; and caused chromosomal abnormalities and reduced mitotic index in Allium cepa bioassay. We demonstrated that under saline conditions of textile effluent, halophilic microbes convert a presumably non-toxic azo dye into hazardous products. The study calls to review the current toxicity classification of azo dyes and develop environmentally sound regulatory policies by incorporating the role of environmental factors in governing dye toxicity, for environmental safety.