The pulmonary route has long been used for drug administration for both local and systemic treatment. It possesses several advantages, which can be categorized into physiological, i.e., large surface area, thin epithelial membrane, highly vascularized, limited enzymatic activity, and patient convenience, i.e., non-invasive, self-administration over oral and systemic routes of drug administration. However, the formulation of dry powder for pulmonary delivery is often challenging due to restrictions on aerodynamic size and the lung’s lower tolerance capacity in comparison with an oral route of drug administration. Various physicochemical properties of dry powder play a major role in the aerosolization, deposition, and clearance along the respiratory tract. To prepare suitable particles with optimal physicochemical properties for inhalation, various manufacturing methods have been established. The most frequently used industrial methods are milling and spray-drying, while several other alternative methods such as spray-freeze-drying, supercritical fluid, non-wetting templates, inkjet-printing, thin-film freezing, and hot-melt extrusion methods are also utilized. The aim of this review is to provide an overview of the respiratory tract structure, particle deposition patterns, and possible drug-clearance mechanisms from the lungs. This review also includes the physicochemical properties of dry powder, various techniques used for the preparation of dry powders, and factors affecting the clinical efficacy, as well as various challenges that need to be addressed in the future.