Buddhists believe the temple to have been hallowed during the third and final visit of the Buddha to Sri Lanka, eight years after gaining enlightenment. Its history would thus go back to before 500 BC. The Mahawamsa records that the original stupa at Kelaniya is enshrined with a gem-studded throne on which the Buddha sat and preached.

The temple flourished during the Kotte era but much of its land was confiscated during the Portuguese empire. Under the Dutch empire, however, there were new gifts of land and under the patronage of King Kirthi Sri Rajasingha the temple was rebuilt.

The temple is also famous for its image of the reclining Buddha and paintings which depict important events in the life of the Buddha, in the history of Buddhism in Sri Lanka.

Thousands of Buddhists come to see the Buddhist pageant of Kelaniya, popularly referred to as Duruthu Maha Perehera of Kelaniya in the month of January every year.