Before the mid-20th century, Phuentsholing was little more than a small trading outpost. Cross-border trade existed, but the harsh terrain and dense jungles of the foothills kept development at bay. The town's modern history began in 1962 with the commencement of the Phuentsholing-Thimphu highway under Project Dantak, a massive infrastructure initiative undertaken with assistance from the Indian Border Roads Organization. This road firmly established Phuentsholing as Bhutan's primary artery to the outside world.
In April 1964, the town was the site of a tragic event in Bhutanese history: the assassination of Prime Minister Jigme Palden Dorji, a leading figure in Bhutan's early modernization efforts. Despite this period of political instability, the town rapidly industrialized and urbanized throughout the 1970s and 1980s.
By the late 20th and early 21st centuries, Phuentsholing transformed into an autonomous municipality (Thromde). The nearby establishment of the Pasakha Industrial Estate further solidified its status as the industrial and financial engine of Bhutan, leading to continuous waves of internal migration from rural Bhutan.