Stem cell-based approaches to restore function after stroke through replacement of dead neurons require the generation of specific neuronal subtypes. Loss of neurons in the cerebral cortex is a major cause of stroke-induced neurological deficits in adult humans. Reprogramming of adult human somatic cells to induced pluripotent stem cells is a novel approach to produce patient-specific cells for autologous transplantation. Whether such cells can be converted to functional cortical neurons that survive and give rise to behavioural recovery after transplantation in the stroke-injured cerebral cortex is not known. We have generated progenitors in vitro, expressing specific cortical markers and giving rise to functional neurons, from long-term self-renewing neuroepithelial-like stem cells, produced from adult human fibroblast-derived induced pluripotent stem cells. At 2 months after transplantation into the stroke-damaged rat cortex, the cortically fated cells showed less proliferation and more efficient conversion to mature neurons with morphological and immunohistochemical characteristics of a cortical phenotype and higher axonal projection density as compared with non-fated cells. Pyramidal morphology and localization of the cells expressing the cortex-specific marker TBR1 in a certain layered pattern provided further evidence supporting the cortical phenotype of the fated, grafted cells, and electrophysiological recordings demonstrated their functionality. Both fated and non-fated cell-transplanted groups showed bilateral recovery of the impaired function in the stepping test compared with vehicle-injected animals. The behavioural improvement at this early time point was most likely not due to neuronal replacement and reconstruction of circuitry. At 5 months after stroke in immunocompromised rats, there was no tumour formation and the grafted cells exhibited electrophysiological properties of mature neurons with evidence of integration in host circuitry. Our findings show, for the first time, that human skin-derived induced pluripotent stem cells can be differentiated to cortical neuronal progenitors, which survive, differentiate to functional neurons and improve neurological outcome after intracortical implantation in a rat stroke model.