Plant endosymbiotic organelles such as mitochondria and chloroplasts harbour a wide array of biochemical reactions. As a part of protein homeostasis to maintain organellar activity and stability, unwanted proteins and peptides need to be completely degraded in a stepwise mechanism termed the processing pathway, where at the last stage single amino acids are released by aminopeptidases. Here, we determined the molecular and physiological functions of a prolyl aminopeptidase homologue PAP1 (At2g14260) that is able to release N-terminal proline. Transcript analyses demonstrate that an alternative transcription start site gives rise to two alternative transcripts, generating two in-frame proteins PAP1.1 and PAP1.2. Subcellular localization studies revealed that the longer isoform PAP1.1, which contains a 51 residue N-terminal extension, is exclusively targeted to chloroplasts, while the truncated isoform PAP1.2 is located in the cytosol. Distinct expression patterns in different tissues and developmental stages were observed. Investigations into the physiological role of PAP1 using loss-of-function mutants revealed that PAP1 activity may be involved in proline homeostasis and accumulation, required for pollen development and tolerance to osmotic stress. Enzymatic activity, subcellular location, and expression patterns of PAP1 suggest a role in the chloroplastic peptide processing pathway and proline homeostasis.