Town Development Fund (TDF) was initially established as TDF Board, by Formation Order 1988 under Development Board Act 1956 and was made autonomous under TDF Act 1997.

In the initial years, TDF was funded by loans from the World Bank, grants and technical assistance from German Technical Cooperation (GTZ) and equity fund from the  GoN until 1997 and technical assistance from United Nations Centre for Human Settlements (UNCHS) until 1993. These funds were pooled as capital fund in TDF for providing loans including soft loans and grants for social infrastructure, urban utility infrastructure and revenue generating projects.

In 1995, the KfW (German Development Bank) provided approximately Euro 4.5 million under Town Development Program (TDP), Phase I, which helped to develop social and revenue generating urban infrastructure in total number of 32 municipalities.

With the successful implementation of the TDP – Phase I, TDF continued to receive support from the KfW (German Development Bank), which resulted in the TDP-Phase II in 2000 and the TDP-Phase II in 2010.

The technical assistance provided by the udle (Urban Development through Local Effort) with the support of government of the Federal Republic of Germany and other bilateral and multi-lateral assistance of national and international experts contributed significantly to the institutional development of TDF.

In 2004, the Asian Development Bank (ADB) had expanded its investment in urban areas through the Urban Environment Improvement Project (UEIP) and the Small Town Water Supply and Sanitation Sector Project (STWSSSP). In these projects TDF was one of the key stakeholders to provide debt financing related urban infrastructure to the participating Municipalities and Water Users’ Committees.

TDF continued partnership with GoN and ADB in Secondary Town Integrated Urban Environment Project (STIUEIP), Integrated Urban Development Project (IUDP), Second Small Town Water Supply and Sanitation Sector Project (STWSSSP-II), Third Small Town Water Supply and Sanitation Sector Project (STWSSSP-III) and Urban Water Supply and Sanitation Sector Project (UWSSSP) as a loan manager.

The TDF, which has been continuously working for the development and expansion of social and revenue generating /economic urban infrastructures of urban areas in Nepal for more than three decades, has invested about Rs. 13 billion in development of Urban Sectors.

Presently, the GoN has prioritized TDF for transformation with bigger mandate and enhance capital structure. Consequently, "Strategy Paper for Expanding Scope of Works and Capital Restructuring of Town Development Fund" has been approved by the cabinet decision of Government of Nepal in 2080.1.26. On the basis of approved strategy paper, the Board of Directors of TDF has approved the "Draft Bill to Amend and Consolidate the Law on Town Development Fund" and is in the necessary process to be submitted to the Parliament by the Ministry of Urban Development.