Background: The traditional wealth index, based on principal component analysis (PCA), used in the Demographic and Health Surveys (DHS) and Multiple Indicator Cluster Surveys (MICS), suffers from urban bias, distorting estimates of health inequality. We compared the traditional index (PEAR1) with an alternative two-component polychoric PCA index (POLY2) using annual expenditure from 12 LSMS surveys as the gold standard to determine which provides more accurate SEP measures for equitable policy targeting. Methods: We compared the traditional wealth index (PEAR1) with a two-component polychoric PCA approach (POLY2) using 12 LSMS (Living Standards Measurement Study) surveys (2015-2022) from 12 African countries. Annual household consumption expenditure was the gold standard. We assessed agreement using weighted Cohen's kappa and validated against education (proportion of households with secondary or higher education) using the concentration index (CIX) and slope index of inequality (SII). Results: The POLY2 index showed higher agreement with expenditure quintiles (average national weighted kappa = 43.3%) than the PEAR1 index (35.1%), with notable improvements in urban (43.5% vs. 27.5%) and rural (35.3% vs. 22.4%) areas. POLY2 also attenuated extreme household distributions observed in PEAR1. Education validation showed that POLY2 produced intermediate inequality gradients between the flatter expenditure-based gradient and the steeper PEAR1-based gradient. Conclusion: The POLY2 wealth index is superior to the traditional index, reducing urban-rural bias and providing more accurate socioeconomic classifications. Its adoption in large-scale surveys such as DHS and MICS is recommended to improve equitable monitoring of health inequalities in low- and middle-income countries.