A direct relationship between foods and health has led to various scientific studies to find out the significance of foods or food components on specific functions in the body. Studies have identified nutrition as a major modifiable determinant playing a role in health promotion and chronic diseases prevention. The term functional food refers to food with specific beneficial functions over their basic nutritional value. We reviewed the factors that have driven the functional food development, various definitions proposed by different authors and their classification. Moreover, we provided an an overview on various functional ingredients in different food sources along with their potential health benefits and risks of adverse effects associated with these products. Lots of research is required to substantiate the potential health benefits of those foods for which the diet–health relationships are not sufficiently validated, and create a strong scientific knowledge base for proper application of naturally present foods in combating various diseases and disorders.