Objective: The objective of the study was to assess the cost of illness of COPD and the influence of severity of the disease over cost of illness and the quality of life. Materials and Methods: The study was conducted in 105 patients aged > 40 years and <70 years, diagnosed with stages II, III and IV COPD. Cost of illness (direct and indirect costs) was calculated in Indian rupees from the expenditures of the hospital visits, pharmacotherapy, oxygen therapy, biochemical investigations, diagnostic procedures, physiotherapy and hospitalization due to acute exacerbations by patient interview and review of patient's case history, medical and billing records. Quality of life of 50 patients in Stage III and Stage IV COPD was estimated using St. George's Respiratory Questionnaire (SGRQ) score. Results: The mean cost spent by the patients with stage II COPD was Rs.3179.62 ± 99.01 per visit to the hospital, stage III was Rs.16414.79 ± 8365.79 and stage IV was Rs.44077.16 ± 15686.21 per visit. As the severity of COPD increased both direct and indirect costs increased and the quality of life of the patient decreased significantly (P=0.000). Out of the total costs, highest was spent on direct medical costs (81.2%). Direct nonmedical costs contributed to 10.6% and indirect costs to 8%. The drivers of the total cost were found to be hospitalizations (36.2%) and length of stay. Conclusion: Since acute exacerbations are the main cause of hospitalization among COPD patients, strategies to prevent severe exacerbations could be very cost effective and may improve the quality of life.