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Topical route of administration is the most commonly used method for the treatment of ophthalmic diseases. However, presence of several layers of permeation barriers starting from the tear film till the inner layers of cornea make it difficult to achieve the therapeutic concentrations in the target tissue within the eye. In order to circumvent these barriers and to provide sustained and targeted drug delivery, tremendous advances have been made in developing efficient and safe drug delivery systems. Liposomes due to their unique structure prove to be extremely beneficial drug carriers as they can entrap both the hydrophilic and hydrophobic drugs. The conventional liposomes had several drawbacks particularly their tendency to aggregate, the instability and leakage of entrapped drug and susceptibility to phagocytosis. Due to this reason, for a long time, liposomes as drug delivery systems did not attract much attention of researchers and clinicians. However, over recent years development of new generation liposomes has opened up new approaches for targeted and sustained drug delivery using liposomes and has rejuvenated the interest of researchers in this field. In this review we present a summary of current literature to understand the anatomical and physiological limitation in achieving adequate ocular bioavailability of topically applied drugs and utility of liposomes in overcoming these limitations. The recent developments related to new generation liposomes are discussed.