The review provides an overview of research findings on microencapsulation for functional textile coatings. Methods for the preparation of microcapsules in textiles include in situ and interfacial polymerization, simple and complex coacervation, molecular inclusion and solvent evaporation from emulsions. Binders play a crucial role in coating formulations. Acrylic and polyurethane binders are commonly used in textile finishing, while organic acids and catalysts can be used for chemical grafting as crosslinkers between microcapsules and cotton fibres. Most of the conventional coating processes can be used for microcapsule-containing coatings, provided that the properties of the microcapsules are appropriate. There are standardised test methods available to evaluate the characteristics and washfastness of coated textiles. Among the functional textiles, the field of environmentally friendly biodegradable textiles with microcapsules is still at an early stage of development. So far, some physicochemical and physical microencapsulation methods using natural polymers or biodegradable synthetic polymers have been applied to produce environmentally friendly antimicrobial, anti-inflammatory or fragranced textiles. Standardised test methods for evaluating the biodegradability of textile materials are available. The stability of biodegradable microcapsules and the durability of coatings during the use and care of textiles still present several challenges that offer many opportunities for further research.