Background The aim of this study was to develop and validate a functional ability index (FAI) that incorporates aspects of intrinsic capacity and environmental factors of older individuals based on the World Health Organization framework of healthy ageing.Methods Data of 7016 participants >= 60 years participating in the baseline survey of China Health and Retirement Longitudinal Study was used for the development and internal validation of the FAI. External validation was performed in a separate cohort of 1295 older individuals aged >= 60 years. Functional independency was considered the primary outcome and additional proxies of healthy ageing were considered as secondary outcomes. Cluster dendrogram was used to identify the distinct hierarchical clusters of all included variables for inclusion in the FAI. Backward elimination logistic regression model was implemented to identify the most significant variables associated with independency to be included in the FAI.Results The FAI score ranged from 0 to 19 and individuals having FAI >= 12 were more likely to be independent and at lower risk of negative outcomes. For each unit increase in the FAI the risk of having independency increased by 30%-58% cross-sectionally in the two cohorts, whilst the 2-year risk of independency increased by 20%. The FAI demonstrated a C-statistic of 0.73 (95% confidence interval, 0.72 and 0.75) for the primary outcome.Conclusions The FAI we developed effectively measured the functional ability status of community dwelling older individuals. FAI could serve as a tool for evaluating older individual's functional ability in routine health assessment.