Cordyceps militaris grown on germinated Rhynchosia nulubilis (GRC) exerts various biological effects, including anti-allergic, anti-inflammatory, and immune-regulatory effects. In this study, we investigated the anti-inflammatory effects of GRC encapsulated in chitosan nanoparticles (CN) against particulate matter (PM)-induced lung inflammation. Optimal CN (CN6) (CHI: TPP w/w ratio of 4:1; TPP pH 2) exhibited a zeta potential of +22.77 mV, suitable for GRC encapsulation. At different GRC concentrations, higher levels (60 and 120 mg/mL) led to increased negative zeta potential, enhancing stability. The optimal GRC concentration for maximum entrapment (31.4 ± 1.35%) and loading efficiency (7.6 ± 0.33%) of GRC encapsulated in CN (GCN) was 8 mg/mL with a diameter of 146.1 ± 54 nm and zeta potential of +30.68. In vivo studies revealed that administering 300 mg/kg of GCN significantly decreased the infiltration of macrophages and T cells in the lung tissues of PM-treated mice, as shown by immunohistochemical analysis of CD4 and F4/80 markers. Additionally, GCN ameliorated PM-induced lung tissue damage, inflammatory cell infiltration, and alveolar septal hypertrophy. GCN also decreased total cells and neutrophils, showing notable anti-inflammatory effects in the bronchoalveolar lavage fluid (BALF) from PM-exposed mice, compared to GRC. Next the anti-inflammatory properties of GCN were further explored in PM- and LPS-exposed RAW264.7 cells; it significantly reduced PM- and LPS-induced cell death, NO production, and levels of inflammatory cytokine mRNAs (IL-1β, IL-6, and COX-2). GCN also suppressed NF-κB/MAPK signaling pathways by reducing levels of p-NF-κB, p-ERK, and p-c-Jun proteins, indicating its potential in managing PM-related inflammatory lung disease. Furthermore, GCN significantly reduced PM- and LPS-induced ROS production. The enhanced bioavailability of GRC components was demonstrated by an increase in fluorescence intensity in the intestinal absorption study using FITC-GCN. Our data indicated that GCN exhibited enhanced bioavailability and potent anti-inflammatory and antioxidant effects in cells and in vivo, making it a promising candidate for mitigating PM-induced lung inflammation and oxidative stress.