Abstract Paddy straw is an abundantly available lignocellulosic biomass in Southern and South-Eastern Asia, which remains in surplus. The surplus straw is either burnt in the farms or dumped openly to get the farms evacuated for next crop, which not only creates the environmental pollution but also loses the potential energy source. It is a vital source of renewable energy and is considered to mitigate the global dependency on fossil fuels by producing sustainable biofuels. Anaerobic digestion is one of the biochemical conversion routes, which utilizes paddy straw for biogas production, and reduces the environmental pollution by preventing straw burning and generating carbon-neutral biofuel. This review paper is focused on anaerobic digestion process as one of the most cost-efficient alternatives for utilization of surplus paddy straw to produce biogas as gaseous biofuel. However, anaerobic digestion of paddy straw faces challenges of relatively low methane yield, high retention time, and instability of anaerobic digestion system due to its recalcitrant structural composition, unbalanced nutrients, and lack of efficient inoculum. These challenges could be conquered by different strategies viz pretreatment of paddy straw, co-digestion with other organic matters, selection of effective inoculum sources, and optimization of process parameters. Thus, the present review highlights the environmental impact and biomethane potential of paddy straw, major challenges and their solutions to enhance the biodigestibility, and factors responsible for process stability. Lastly, few approaches to attain the process sustainability by adopting efficient supply-chain logistics and future advanced technologies have also been discussed.