By 1878 a railway had been completed from Calcutta (now Kolkata) to Siliguri, almost to the base of the Himalayas, and a tonga service took travellers thence up the hill portion of the journey. But the ascent by tongas soon led to dissatisfaction with this means of transit, and the idea for inception of the laying of a steam tramway along the road from Siliguri to Darjeeling arose.

The tonga service on the cart road alluded above served travellers and traders for ten years, but when the obvious disavantages of such a means of communication led to proposals for the laying of a steam tramway from Siliguri to Darjeeling, Mr. Franklin Prestage (at that time Agent of the Eastern Bengal Railway Company) approached the Government of Bengal in 1878 with a detailed scheme. Sir Ashley Eden, the Lieutenant-Governor, appointed a Committee to examine the project, and this Committee reported that the construction of a steam tramway was feasible and would be great advantage, both to the Government and the public. The cart road had indeed suffered heavily from slips during each rainy season and inconvenience and lengthy interruption to communications had resulted. The upkeep of the road moreover, cost the Government about one and a half lakhs of rupees anually, and it was hoped that the tramway would be able to help to defray this cost.

Mr. Prestage's scheme was gladly accepted in 1879, and the construction of the tramway was commenced and pushed on with great rapidity. By March 1880 the line had been opened to Tindharia, and Lord Lytton, the first Viceroy to visit Darjeeling, was conveyed so far by the Company. Before the end of that year the line was complete to Kurseong, and in July 1881 it was opened for traffic right through to Darjeeling. The name of the Company was then changed to the more dignified appellation of the "Darjeeling Himalayan Railway Company". Messrs. Gillanders Arbuthnot & Co., one of the leading and oldest firms in Calcutta, were appointed agents of the Company from its inception.

In the first instance the alignment of the railway followed that of the cart road throughout, but it soon became apparent that some of the grades on the road were very much steeper than the locomotives could manage without great waste of power. Therefore a ruling gradient of 1 to 25 had been aimed at by the engineers of the Company though in places a gradient of 1 to 20 still exits, hence we find that the railway at times leaves the road altogether and at other times attains a different alignment by means of "Loops" and "Reverses". Here it may be stated that in the "loop" the railway track circles round and passes over itself by a bridge, thereby quickly attaining a higher elevation and an immediately better alignment. In the "reverse" the same object is obtained by running the track back diagonally up the hill-side for a short distance, and then again resuming an alignment parallel to the original alignment but higher up the side of the mountain.

The engine originally employed was very small even for a two-foot track, and was only capable of drawing a load of about 7 tons. But later on it was improved to the standard type which was able to draw a load of 35 tons up the improved track.The original passenger vehicle was a small four-wheeled trolley with canvas roof and two wooden benches for seats, but some years later bogie railway stock was introduced. New workshops were opened at Tindharia in 1914, and all rolling-stock built in the workshops with the exception of the wheels which are imported.