Caching stores frequently accessed data in memory to improve the performance of web applications. There are several types of caching in ASP.NET including output caching, data caching, object caching, and class caching. Output caching caches entire page output while data caching caches data source controls. Object caching provides flexibility to cache any object type using a key name. Caching avoids processing overhead by retrieving cached data from memory instead of generating it for each request.