Lipid droplets (LDs) are dynamic cytoplasmic organelles present in most eukaryotic cells. The appearance of LDs in neurons is not usually observed under physiological conditions, but is associated with neural diseases. It remains unclear how LD dynamics is regulated in neurons and how the appearance of LDs affects neuronal functions. We discovered that mutations of two key lipolysis genes atgl‐1 and lid‐1 lead to LD appearance in neurons of Caenorhabditis elegans. This neuronal lipid accumulation protects neurons from hyperactivation‐triggered neurodegeneration, with a mild decrease in touch sensation. We also discovered that reduced biosynthesis of polyunsaturated fatty acids (PUFAs) causes similar effects and synergizes with decreased lipolysis. Furthermore, we demonstrated that these changes in lipolysis and PUFA biosynthesis increase PUFA partitioning toward triacylglycerol, and reduced incorporation of PUFAs into phospholipids increases neuronal protection. Together, these results suggest the crucial role of neuronal lipolysis in cell‐autonomous regulation of neural functions and neurodegeneration.