Aim: This study aimed to assess the relationship between functional limitations and depression among community‐dwelling older adults in Malaysia. Methods: Data from a nation‐wide community‐based cross‐sectional study were analyzed. This study was conducted using a two‐stage stratified random sampling design. In total, 3772 older adults aged ≥60 years responded to the survey. Depression was identified using a validated Malay version of the Geriatric Depression Scale (M‐GDS‐14), with those scored ≥6 categorized as having depression. Functional limitations were assessed using both Barthel's Activities of Daily Living (ADL) and Lawton's Instrumental Activities of Daily Living (IADL). The relationship was determined by multivariate logistic regression, adjusted for other variables. Results: The prevalence of depression was 11.5% (95% confidence interval [CI] 9.4, 13.4). Multiple logistic regression analysis found that older adults with limitations in ADL were 2.6 times more likely of having depression (adjusted odds ratio [aOR] 2.58, 95% CI 2.01, 3.32), while those with limitations in IADL the risk of having depression was almost doubled (aOR 1.68, 95% CI: 1.32, 2.14). Other significant factors were incontinence (aOR 3.33, 95% CI: 2.33, 4.74), chronic medical illness (aOR 1.44, 95% CI: 1.15, 1.81), current smoker (aOR 4.19, 95% CI: 1.69, 10.39), poor social support (aOR 4.30, 95% CI: 2.98, 6.20), do not have partner, ethnic minorities and low individual monthly income. Conclusions: Older adults with functional limitation in both basic ADL and complex IADL are independently at higher risk of having depression. Geriatr Gerontol Int 2020; 20: 21–25.