The government of Bhutan has been a constitutional monarchy since 18 July 2008. The King of Bhutan is the head of state. The executive power is exercised by the Lhengye Zhungtshog, or council of ministers, headed by the Prime Minister. Legislative power is vested in the bicameral Parliament, both the upper house, National Council, and the lower house, National Assembly. A royal edict issued on April 22, 2007 lifted the previous ban on political parties in anticipation of the National Assembly elections in the following year. In 2008, Bhutan adopted its first modern Constitution, codifying the institutions of government and the legal framework for a democratic multi-party system.

The Economist Intelligence Unit rated Bhutan a "hybrid regime" in 2023.

Bhutanese external relations and foreign policies were put under British control following the 1910 Treaty of Punakha. However, due to the policy of self-imposed isolationism, the effect of the treaty was limited to an extent. After Indian independence in 1949, Bhutan and India agreed to a ten-article, perpetual treaty which effectively continued the relationship, but with India replacing the United Kingdom. India agreed not to interfere in Bhutan's internal relations, while Bhutan agreed "to be guided by the advice of the Government of India in regard to its external relations" (Article 2). The treaty also established free trade and full extradition between the two countries.

In February 2007, the Indo-Bhutan Friendship Treaty was substantially revised with all references to phrases such as "will be guided" deleted, thus eliminating the last lingering doubts about the sovereign and independent status of Bhutan.

The Constitution of Bhutan provides for a government consisting of three main branches – executive, legislative, and judicial – plus the de facto apolitical Dratshang Lhentshog (Monastic Affairs Commission) of the Drukpa Kagyu state religion. The secular and religious branches of government are unified in the person of the Druk Gyalpo (King of Bhutan).

The trichotomy of secular government is not absolute. There are many independent commissions, agencies, and institutions that operate outside this general framework, such as the Royal Monetary Authority and Election Commission. There are also agencies whose members are drawn from more than one branch of government, such as the Judicial Commission. In addition, there are several ministries within the cabinet executive branch, such as the Ministry of Home and Cultural Affairs, which in turn delegate powers to subsidiary departments according to legislation by the legislative branch. The legislative branch itself oversees devolved local governments.

Bhutan's head of state is the Druk Gyalpo ("Dragon King"). Although his title is hereditary, he must retire by age 65, and he can be removed by a two-thirds majority vote by the parliament followed by a national referendum, which must pass by a simple majority in all twenty districts of the country. Prior to 2008, a similar abdication process existed under which the unicameral National Assembly, or Tshogdu could force the king to abdicate.

The Je Khenpo is the highest religious official of Bhutan and head of the Dratshang Lhentshog (Monastic Affairs Commission). He is typically viewed as the closest and most powerful advisor to the King of Bhutan. The 70th and present Je Khenpo is Jigme Chhoeda.