The aim of this study was to optimize the drying conditions (pretreatments and drying temperatures) of red bell pepper to obtain red bell pepper powder (RBP) with maximum bioactive retention and assess its potential use as a functional ingredient in bread. The RBP pretreated (blanching + dipping in ascorbic and citric acid solution) and dried at 60°C retained the highest bioactive compounds. Wheat flour blends were prepared with RBP at 0%, 2%, 4%, 6%, 8%, and 10% level of incorporation and among hydration properties, water absorption increased with increasing levels. The prepared breads were assayed for physical, nutritional, bioactive, and sensory characteristics. Bread supplementation with RBP improves its color, mineral, fiber, and bioactive properties. However, the texture of bread becomes hard with the increased level of RBP due to a decrease in specific volume. The significant increment was recorded for bioactive compounds, such as total phenols, antioxidant activity, flavonoids, and carotenoids as the level of powder increased. Bread enriched with 6% RBP showed highest sensory scores (8.45) and index of acceptability (87.83%) as compared to other breads. Thus, RBP acts as a valuable supplement for developing bread with improved nutritional and bioactive constituents. PRACTICAL APPLICATION: This study describes the effect of different pretreatments and drying temperatures for processing of RBP as a functional ingredient in bread, being a staple food around the world. RBP powder is a novel ingredient that improved the nutritional, bioactive, and appearance of bread. Hence, it will be helpful in the utilization of perishable crops like bell pepper and will demonstrate its commercial viability to improve the nutritive value of bakery products.