Magnetic particle imaging (MPI) has gained significant traction as an ionising radiation-free tomographic method that offers real-time imaging capabilities with enhanced sensitivity and resolutions. In this technique, magnetic nanoparticles (MNPs) are employed, particularly iron oxide nanoparticles with superparamagnetic nature, as probes within the MPI system. These MNPs enable the tracking and precise quantification of particle movement with minimal background noise. The 3D location and concentration of MNPs can provide better insights for multiple applications in vascular imaging, cell tracking, cancer cell imaging, inflammation, implant monitoring, and trauma imaging and can thus accelerate the diagnosis of disorders. The mononuclear phagocyte system provides a significant advantage, as they are involved in the spontaneous clearance of the tracers used in MPI, which readily minimise the toxic effects. Several studies have demonstrated that MPI-based functional neuroimaging is superior to other imaging modalities, providing adequate temporal resolution images with quick scan intervals. In MPI, nanoparticles are solely responsible for the source and visualisation, unlike magnetic resonance imaging (MRI), where nanoparticles were used only as supportive tracers. This review provides an overview of the principle, diagnostic, and therapeutic applications of MPI as well as the advantages and challenges MPI has over other diagnostic imaging methods in modern clinical setups.