Magnetic nanoparticles (MNPs) offer tremendous potentialities in biomedical applications for a long while. Since these materials' interactions in biological media largely rely on their crystal structures, sizes, and shapes, detailed studies on their synthesis mechanism for medicinal aspects are crucial. Despite many review reports that have already been published on MNPs, they mainly have focused either on their perspective in biomedical applications or their synthesis and characterization along with functionalization mechanisms as individual entities. For this reason, this review uncovers a comprehensive insight into the ongoing improvement of fabrication processes, surface functionalization of MNPs for biomedical applications together. Besides, various magnetic nanocomposite (MNCs) for smart drug delivery, recent hyperthermia treatment, lab‐on‐a‐chip, and magnetic bio‐separation, and some of the recent emerging imaging techniques using MNPs are discussed. A detailed analysis of toxicity, challenges, and recent progress of clinical trials of MNPs is sketched out to open numerous entryways for advanced research on MNPs for biomedical applications.