The invention relates to a preparation method of an encapsulated chain wheel for powder metallurgy. The method comprises the following steps: 0-3.0% by mass of Cu, 0-3.0% by mass of Ni, 0.6%-0.9% by mass of C, 0.2%-0.8% by mass of a lubricant and the balance of Fe are mixed, forming and sintering are performed, the chain wheel is subjected to densification and then is subjected to reshaping, heat treatment, cleaning, sand blasting, encapsulation, injection molding, secondary vulcanization and machining, and the encapsulated chain wheel for powder metallurgy is obtained. By densification of the surface of the chain wheel, various kinds of grease are effectively prevented from permeating holes in a production process of powder metallurgy parts, so that all residual grease on the surfaces of the parts can be removed in a following cleaning process, adverse effects of the grease on bonding of powder metallurgy parts and rubber are avoided, the method has the characteristics of simplicity in technology and convenience in process, the problem about bonding of metal and the rubber in the encapsulation process of the chain wheel is solved better, the complicated procedure of degreasing after the grease permeates the powder metallurgy parts is avoided, the cost is low, and the mechanical properties of the product are not reduced.