Troeltsch's father, a physician, early instilled in his son a passion for scientific observation and led him to see problems of history and civilization within a framework of the development of the sciences. After Troeltsch's school years at the Augsburg Gymnasium, where he acquired a solid grounding in classical languages and literature, he decided to study theology, which, according to an autobiographical sketch, seemed to him at that time the only study in which his historical, philosophical, and social interests could meet in the investigation of a worthwhile subject matter. He studied Protestant (Lutheran) theology at the universities of Erlangen, Göttingen, and Berlin, becoming in turn Privatdocent (lecturer) at Göttingen, associate professor at Bonn (1892), and professor of theology at Heidelberg (1894). He married in 1901, and an only son was born in 1913.

During 21 years at Heidelberg he published, besides his Grundprobleme der Ethik (1902; Fundamental Problems of Ethics), a large number of articles on various subjects thematically linked with the development of the Christian churches. Many of these were later integrated into his best known work, Die Soziallehren der christlichen Kirchen und Gruppen. In that work he explored the relationships between and within social and cultural groups in the context of the social ethics of the Christian churches, denominations, and sects. In 1915, realizing that his strength lay more in the philosophy of religion than in theology, he moved to a chair of philosophy at Berlin, a post he held until his death in 1923.

Troeltsch had a considerable influence on younger theologians of his time, especially through his insistence that the church must drastically rethink its attitude toward “absolutist” claims made for the truth of its doctrines. He was both fascinated and troubled by “historicism” (historical relativism): the view that whatever is valued, pursued, conceived, or achieved at any given time or place is relative to, and only understandable in the context of, the conditions of that time or place. Although the view seemed to him in important respects inescapable, he surmised that it applied inadequately to the norms—whether legal, religious, or ethical—that govern human conduct. If consistently applied, the historicist view would, he thought, make any present understanding of past ages impossible. The polymorphous, historically changing dogmas of the Christian church had to be reconciled with the absolute aspects of revealed truth interpreted anew by every generation. Despite this, many theologians have seen in Troeltsch only a critic of the certainties of Christianity. Paul Tillich (Tillich, Paul) (1886–1965), for example, accused him of sacrificing the absolute to the purely relative in religion (Kant-Studien, 1924).

Troeltsch's thought, never purely abstract, is always based on extensive knowledge of historical and factual data. His work has been influential precisely in those aspects that reveal his dislike of very general terms of reference—in its pioneering study of small social units or groups, such as the family, the guild, and the individual state, church, or sect, and also in its advocacy of the comparative approach to religious studies. Within Protestantism, he made important contributions to the study of the genesis of Lutheranism and Calvinism and their differing social ethics and social impact. Here he was in close sympathy concerning the nature of Protestant ethics with his friend the German sociologist and economist Max Weber (1864–1920). Troeltsch was familiar with the Marxist approach to sociology and found its perspective on the socioeconomic substructure of civilization exciting and superior to the then current Hegelian view of history as the forward march of an inevitable dialectical process. Yet he rejected Marxism in favour of a more flexible conception of the interaction of cultural, social, and economic factors. This preoccupation with the problems of historical relativity and what he called the logic of historical development found expression in a late but important work, Der Historismus und seine Probleme (1922; Historical Relativism and Its Problems).

Troeltsch had more than an academic interest in social and political affairs. He was a member of the Baden Upper House during his years in Heidelberg, later, in Berlin, a member of the Prussian Landtag (the provincial legislature), and, for a number of years, undersecretary of state for religious affairs. Pondering the reasons, in the aftermath of World War I, for Germany's disastrous estrangement from the ethical, political, and social thought of the Western democracies, he put high on his list the glorification of the state at the expense of the rights and dignity of the individual.

A plan to visit England was frustrated by his death in 1923. The course of five lectures, which he was to have delivered in London and Oxford during March of that year, was published posthumously under a title that puts his work in perspective: Der Historismus und seine Überwindung (“Overcoming Historical Relativism”), a more revealing title than that of the English edition (Christian Thought: Its History and Application). Three volumes of Troeltsch's collected works appeared toward the end of his life, a fourth being published after his death (Gesammelte Schriften, 4 vol., 1922–25). They do not contain all his published writings but those for which Troeltsch himself would have wished to be remembered.