Background <p>Functional independence is a cornerstone of healthy aging, yet its erosion due to mental health disorders remains understudied in low- and middle-income countries. In India, where over 30% of older adults exhibit depressive symptoms, depression may be strongly associated with physical dependency. The study aims to examine the association between depression and functional limitations—measured through a composite ADL-IADL index—among Indian older adults using nationally representative LASI data.</p> Methods <p>A cross-sectional analytical design was employed using LASI Wave 1 data (<i>N</i> = 28,088). Depression status (CES-D score ≥ 4) served as the treatment variable, and functional limitation score (range: 0–13) as the outcome. Propensity score matching with caliper (0.01 SD) was applied to control for confounders, followed by ATT estimation and sensitivity analysis.</p> Results <p>After matching, depression was associated with an increase in functional limitations by an average of 0.69 points (95% CI: 0.61–0.77, <i>p</i> &lt; 0.001). Higher prevalence of functional limitations was also observed among older adults reporting pain, sleep difficulty, multimorbidity, and low physical activity. Matching diagnostics confirmed covariate balance and robustness to unmeasured confounding.</p> Conclusion <p>Depression strongly associated with late-life disability in India. Addressing mental health may contribute to dual benefits—enhancing psychosocial well-being and preserving functional autonomy in aging. Given the cross-sectional nature of the data, findings should be interpreted as associative rather than causal.</p>