Tissue engineering employs combination of biomaterials and cell therapy to develop new therapeutic strategies for neurodegenerative diseases, spinal cord, and traumatic brain injuries. Alginate is a biocompatible hydrogel, which has been used broadly to encapsulate many types of cells. Human adipose-derived stem cells (hADSCs) have appropriate property to differentiate into neuron-like cells. Therefore, the aim of this study was to evaluate the effect of alginate hydrogel on the viability and neural differentiation potential of induced hADSCs. After neural induction of isolated hADSCs and encapsulated in alginate hydrogel, the cell viability using MTT assay and their neural differentiation potential by immunocytochemical and real time RT-PCR analysis for neural markers (Nestin, GFAP, and MAP2) were evaluated. Expression of Nestin, GFAP, and MAP2 markers was significantly increased compare to monolayer induced cells (p < 0.001), but we did not found any significant effect on viability of induced cells relative to monolayer induced cells. Although neural differentiation of encapsulated cells was increased relative to monolayer induced cells, the viability of these cells was not significantly different in alginate hydrogel as compared with monolayer induced cells. © 2013 Wiley Periodicals, Inc. J Biomed Mater Res Part B: Appl Biomater, 102B: 749–755, 2014.