Formerly, Palayan City was a Government Stock Farm situated within the Municipality of Bongabon. The city is one of the six cities in the Philippines (namely Manila, Baguio, Quezon City, Trece Martires, Island Garden City of Samal, and Palayan City) whose creation was explicitly planned by the local leaders, passed through enormous deliberations and proceedings by the legislative (Congress) and executive (Senate) branch of the government and eventually approved by the President of the Republic of the Philippines.
On March 26, 1952, the leaders of Nueva Ecija- Governor Leopoldo Diaz, Congressman Jesus Ilagan, Board Members Dioscoro de Leon, Antonio Corpuz and Don Felipe Buencamino, and all mayors of Nueva Ecija convened to talk and plan about the transfer of the capital of Nueva Ecija from Cabanatuan to other municipality. The following locations were suggested: Gapan, San Jose, Santa Rosa, Guimba, Talavera, General Tinio, Baloc (presently Santo Domingo), Muñoz, and the Government Stock Farm (presently Palayan City). After the meeting, the majority agreed that the Government Stock Farm be made as the new capitol site. (1)
The Congress of the Philippines enacted RA 4475 on June 19, 1965, creating Palayan City as the new capital of Nueva Ecija. “Palayan” was chosen as its name, attributed to the province being dubbed as the Rice Granary of the region and the country. Proclamation No. 495 was issued by President Ramon Magsaysay designating December 5, 1965 as the date for the formal organization of the City of Palayan. (Executed on November 18, 1965 in Malacanang Palace, Manila)
Originally, Barangays Malate and Sapang Buho, Municipality of Bongabon and Barangay Ganaderia, Municipality of Laur comprise the city proper until the amendments in 1969,  wherein Barangay Maligaya and Fort Magsaysay Cantonment Area, both of Municipality of Laur became a territorial part of the city.
The city was enlarged by virtue of RA 6052 on August 4, 1969 (1) authored by then Congressman Angel Concepcion, which provided for the inclusion of the Military Reservation in Municipality of Laur and Fort Magsaysay Cantonment Area within the Municipality of Sta. Rosa.
On March 9, 1972, Presidential Proclamation No. 983 (1) was enacted, which stipulates that a portion of the government stock farm was allocated to the displaced population of Pantabangan because of the construction of the dam. The resettlement site was eventually converted into regular barangay known as Marcos Village.
The training ground of the Philippine Army was transferred from Fort Bonifacio to Fort Magsaysay in 1983. This transfer facilitated the development of the reservation area into a training complex to serve the army’s training requirements.
On 1984, the city has 14 total number of barangays, namely: Malate (Poblacion), Ganaderia (Poblacion), Sapang Buho, Marcos Village, Imelda Valley, Atate, Singalat, Manacnac, Aulo, Mapaet, Militar, Maligaya, Doña Josefa and the inclusion of Palale, being part of the Military Reservation Area. These barangays turned into 18 on 1988 (during the term of Mayor Pacifico Fajardo) with the inclusion of Caballero, Santolan, Caimito and Langka.
Two more barangays were added in the city on 1995. Barangay Popolon, formerly of Municipality of Bongabon, has been annexed by virtue of RA 8030  – An Act altering substantially the boundaries and/or transferring the territorial jurisdiction of Barangay Popolon from the Municipality of Bongabon to the City of Palayan, Province of Nueva Ecija, exercising administrative control and supervision over the said Barangay and for other purposes. This Act was eventually approved by the people in a plebiscite on October 1, 1995. 
Then Barangay Bagong Buhay, one of the three resettlement areas, was converted to a regular barangay on a November 26, 1995 plebiscite to ratify the creation of Sitio Bagong Buhay into a regular barangay out of mother barangay Maligaya. 
On September 7, 2006, Barangay Palale was excluded in the city and was awarded to the Municipality of General Tinio by virtue of a Supreme Court decision due to argumentations on local and political boundaries. 
Since then, the city maintains political and boundary jurisdiction over the above-mentioned 19 barangays.