Panchayati Raj Institutions (PRIs), established under the 73rd Constitutional Amendment Act of 1992, are the backbone of decentralized governance and grassroots democracy in rural India. This research will analyse the structure, the roles and the functions, and the challenges faced by Panchayati Raj Institutions in the state of Arunachal Pradesh, which is characterised by diversity in tribal identity, geographical isolation and socio-cultural heterogeneity. The methodology used for this study is descriptive, analytical, and exploratory, and is based on secondary data sources. This study has illustrated how PRIs are being used as tools of participatory governance, rural development, and social transformation in the state of Arunachal Pradesh. The study has also shown that PRIs were established as a three-tier structure Gram Panchayat, Anchal Samiti and Zilla Parishad yet are frequently functioning as a two-tier system because of functionalities at the intermediate level. PRIs contribute to the implementation of development programmes, facilitate inclusive participation by members of their communities, ensure the delivery of services to their constituents, and promote accountability. At the same time, PRIs are constrained from realising their true potential as a result of barriers such as insufficient financial autonomy; the lack of basic infrastructure; limited administrative capacity; geographical isolation; and the co-existence of traditional tribal institutions. To maximise the effectiveness of PRIs in achieving sustainable, inclusive rural development in Arunachal Pradesh, strengthening PRIs through increased devolution of powers, capacity building, and improved institutional co-ordination will be imperative.