Human umbilical cord derived mesenchymal stem cells (hUC-MSCs) are known for self-renewal and differentiation into cells of various lineages like bone, cartilage and fat. They have been used in biomedical applications to treat degenerative disorders. However, to exploit the therapeutic potential of stem cells, there is a requirement of sensitive non-invasive imaging techniques which will offer the ability to track transplanted cells, bio-distribution, proliferation and differentiation. In this study, we have analyzed the efficacy of human serum albumin coated iron oxide nanoparticles (HSA-IONPs) on the differentiation of hUC-MSCs. The colloidal stability of the HSA-IONPs was tested over a long period of time (≥20 months) and the optimized concentration of HSA-IONPs for labeling the stem cells was 60 μg ml(-1). Detailed in vitro assays have been performed to ascertain the effect of the nanoparticles (NPs) on stem cells. Lactate dehydrogenase (LDH) assay showed minimum release of LDH depicting the least disruptions in cellular membrane. At the same time, mitochondrial impairment of the cells was also not observed by 3-(4,5-dimethylthiazol-2-yl)-2,5-diphenyltetrazolium bromide (MTT) assay. Flow cytometry analysis revealed lesser generation of reactive oxygen species in HSA-IONPs labeled hUC-MSCs in comparison to bare and commercial IONPs. Transmission electron microscopy showed endocytic engulfment of the NPs by the hUC-MSCs. During the process, the gross morphologies of the actin cytoskeleton were found to be intact as shown by immunofluorescence microscopy. Also, the engulfment of the HSA-IONPs did not show any detrimental effect on the differentiation potential of the stem cells into adipocytes, osteocytes and chondrocytes, thereby confirming that the inherent properties of stem cells were maintained.