Background: The goal of effective treatment for dermal fungal infections could be highly beneficial by the delivery of antifungal drugs on skin from liposomal application. Topical delivery involves minimizing the flux of the drug through the skin while maximizing its retention on the skin. The aim of the present work was the investigation of the effects of lipids and cholesterol for the development of liposomal formulations as potential carriers for antifungal agent terbinafine HCl. Phospholipon 90H (Hydrogenated phosphatidylcholine) and Dimyristoylglycero-3-phosphocholine (DMPC) along with cholesterol were used for preparation of liposomes by ethanol injection method and characterized for drug content, entrapment efficiency, size, zetapotential, vesicle morphology, stability, FTIR, in vitro and ex vivo drug retention studies. Results: Drug entrapment ranged between 39.46±0.91% to 70.39±0.71%. Vesicles showed good morphological characters with a narrow size distribution, in the size range of 206.9 to 344.8 nm. Gum karaya gel loaded with liposomal dispersion showed prolonged drug retention on the rat skin during ex vivo studies compared to liposomal dispersion and gum karaya plain gel loaded with drug. Conclusion: The prolonged retention of drug by the gum karaya gel loaded with liposomal dispersion could effectively exhibit the antifungal activity for prolonged periods for cutaneous delivery.