Acylated chitosan (Myristoyl and Octanoyl) coated paclitaxel-loaded liposomal formulation was developed with an aim to overcome the cremophor EL related toxicities. They were evaluated for drug entrapment, in vitro drug release, and cytotoxicity and cell uptake behavior using A549 cells. The 99mTc radio-labeled formulations were also evaluated in vivo in Ehrlich Ascites Tumor (EAT) bearing mice for biodistribution and tumor uptake. The mean particle size of both coated and uncoated liposomal formulations was found to be in the range of 180–200 nm with high drug entrapment efficiency (>90% in case of uncoated liposomes and 80 ± 5% in case of coated liposomes). The uncoated liposomes displayed negative zeta potential (−10.5 ± 4.9 mV) whereas coated liposomes displayed positive zeta potential in the range of +21 to +27 mV. Slower drug release was observed in case of liposomes coated with acylated chitosans as compared to uncoated and native chitosan coated liposomes. All liposomal formulations were found less cytotoxic than paclitaxel injection (Celtax™, Celon Labs, India). In vitro cell uptake and intracellular distribution studies confirmed the cytosolic delivery of uncoated and coated liposomes. The myristoyl chitosan coated liposomal system (LMC) exhibited improved pharmacokinetic, biodistribution and tumor uptake characteristics over other formulations. These obtained results confirmed the potential application of acylated chitosn coated liposomal delivery systems (LMC) in tumor targeting of paclitaxel and other drugs.