Induced pluripotent stem cells (iPSCs) have the potential to revolutionise cell therapy; however, it remains unclear whether iPSCs can be generated from human osteoarthritic chondrocytes (OCs) and subsequently induced to differentiate into chondrocytes. In the present study, we investigated the differentiation potential of OCs into iPSCs using defined transcription factors and explored the possibility of using these OC-derived iPSCs for chondrogenesis. Our study demonstrates that iPSCs can be generated from OCs and that these iPSCs are indistinguishable from human embryonic stem cells (hESCs). To promote chondrogenic differentiation, we used lentivirus to transduce iPSCs seeded in alginate matrix with transforming growth factor-β1 (TGF-β1) and then in vitro co-cultured these iPSCs with chondrocytes. Gene expression analysis showed that this combinational strategy promotes the differentiation of the established iPSCs into chondrocytes in alginate matrix. Increased expression of cartilage-related genes, including collagen II, aggrecan, and cartilage oligomeric matrix protein (COMP), and decreased gene expression of the degenerative cartilage marker, vascular endothelial growth factor (VEGF), were observed. The histological results revealed a dense sulphated extracellular matrix in the co-culture of TGF-β1-transfected iPSCs with chondrocytes in alginate matrix. Additionally, in vivo chondroinductive activity was also evaluated. Histological examination revealed that more new cartilage was formed in the co-culture of TGF-β1-transfected iPSCs with chondrocytes in alginate matrix. Taken together, our data indicate that iPSCs can be generated from OCs by defined factors and the combinational strategy results in significantly improved chondrogenesis of OC-derived iPSCs. This work adds to our understanding of potential solutions to osteoarthritic cell replacement problem.