The town shares its name with the dzong built in 1638 that dominates the district. The name is said to have been given by Ngawang Namgyal, the 1st Zhabdrung Rinpoche, who was searching for the best location for a dzong to prevent incursions from the south. At the chosen spot, the Zhabdrung encountered a boy named Wangdi playing beside the river and hence named the dzong "Wangdi's Palace".

Wangdi Phodrang Dzong burnt down in the afternoon of 24 June 2012. However, the dzong was being renovated at the time, so most of the historical relics had already been put into storage and were saved from destruction. Shortly after the fire, more than 1000 Japanese sympathizers donated an equivalent of over US$134,500 to the Wangdue Phodrang Reconstruction Fund.Other donations have also arrived, but reconstruction is still underway as of 2014.