Azo dyes are known to be a very important and widely used class of toxic and carcinogenic compounds. Although lot of research has been carried out for their removal from industrial effluents, very little attention is given to changes in their toxicity and mutagenicity during the treatment processes. Present investigation describes isolation of a Bacillus velezensis culture capable of degrading azo dye Direct Red 28 (DR28). Azoreductase enzyme was isolated from it, and its molecular weight was found to be 60 kDa. The enzyme required NADH as cofactor and was oxygen-insensitive. Toxicity and mutagenicity of the dye during biodegradation was monitored by using a battery of carefully selected in vitro tests. The culture was found to degrade DR28 to benzidine and 4-aminobiphenyl, both of which are potent mutagens. However, on longer incubation, both the compounds were degraded further, resulting in reduction in toxicity and mutagenicity of the dye. Thus, the culture seems to be a suitable candidate for further study for both decolourization and detoxification of azo dyes, resulting in their safe disposal.