The advent of biodegradable polymer-encapsulated drug nanoparticles has made the pulmonary route of administration an exciting area of drug delivery research. Chitosan, a natural biodegradable and biocompatible polysaccharide has received enormous attention as a carrier for drug delivery. Recently, nanoparticles of chitosan (CS) and its synthetic derivatives have been investigated for the encapsulation and delivery of many drugs with improved targeting and controlled release. Herein, recent advances in the preparation and use of micro-/nanoparticles of chitosan and its derivatives for pulmonary delivery of various therapeutic agents (drugs, genes, vaccines) are reviewed. Although chitosan has wide applications in terms of formulations and routes of drug delivery, this review is focused on pulmonary delivery of drug-encapsulated nanoparticles of chitosan and its derivatives. In addition, the controversial toxicological effects of chitosan nanoparticles for lung delivery will also be discussed.