The development of effective drug formulations and delivery systems for newly developed or marketed drug molecules remains a significant challenge. These drugs can exhibit polymorphic conversion, poor bioavailability, and systemic toxicity, and can be difficult to formulate with traditional organic solvents due to acute toxicity. Ionic liquids (ILs) are recognized as solvents that can improve the pharmacokinetic and pharmacodynamic properties of drugs. ILs can address the operational/functional challenges associated with traditional organic solvents. However, many ILs are non-biodegradable and inherently toxic, which is the most significant challenge in developing IL-based drug formulations and delivery systems. Biocompatible ILs comprising biocompatible cations and anions mainly derived from bio-renewable sources are considered a green alternative to both conventional ILs and organic/inorganic solvents. This review covers the technologies and strategies developed to design biocompatible ILs, focusing on the design of biocompatible IL-based drug formulations and delivery systems, and discusses the advantages of these ILs in pharmaceutical and biomedical applications. Furthermore, this review will provide guidance on transitioning to biocompatible ILs rather than commonly used toxic ILs and organic solvents in fields ranging from chemical synthesis to pharmaceutics.