The invention discloses a water-based cutting fluid used for processing neodymium-iron-boron material slices and an application method thereof. The cutting fluid comprises the following components in parts by weight: organic amine, organic acid, water-soluble phosphate, polyether, antirust corrosion inhibitor, dispersing agent and surfactant, antiseptic bactericide, anti-hard-water agent, defoaming agent, auxiliary agent and water, wherein environmentally-friendly lubricating agent, extreme-pressure agent and antirust agent are reasonably matched in the cutting fluid disclosed by the invention, thus the lubricating property, extreme pressure property and antirust property of the cutting fluid are guaranteed; organic base, organic acid and special auxiliary agent are reasonably matched, thus the corrosion dissolution phenomenon of the cutting fluid to adhesive is greatly weakened; the dispersing agent and the surfactant are used for reducing surface tension of solution, thus permeability and settlement performance of the cutting fluid are enhanced; pH value of a final product is 7.5-8.5; and solubility of the cutting fluid to adhesive used for binding neodymium-iron-boron material in a processing cycle is extremely low, and the condition that product processing accuracy error is large or a tool is damaged as the adhesive is dissolved by the cutting fluid can not be caused.