Organic-inorganic hybrid two-dimensional (2D) ruddlesden-popper (RP) perovskites with fantastic optoelectronic properties and good stability have attracted tremendous attention for the potential applications in photovoltaics and electroluminescence. Recently, a new all-inorganic Cs₂PbI₂Cl₂ 2D perovskite has been proposed with excellent excitonic absorption and improved ambient and thermal stability. Herein, an interesting light-induced phase transition and photochromism in the Cs₂PbI₂Cl₂ were reported. Under low fluence light pumping, the room temperature photoluminescence (PL) of Cs₂PbI₂Cl₂ is dominated by a weak violet excitonic emission peaked at 412 nm. Surprisingly, the emission color gradually changes from violet to bright red while increasing the laser pumping fluence. This photochromic effect is determined to be caused by forming CsPbI₃ phase within the Cs₂PbI₂Cl₂ crystals, which is efficiently driven by thermal energy. Due to protection by the Cs₂PbI₂Cl₂ matrix, the embedded CsPbI₃ nanocrystals show improved stability than standard pure CsPbI₃. Therefore, the Cs₂PbI₂Cl₂ perovskite with photochromic feature may find applications in optical encryption, as preliminarily shown in this work.