练 means to practice, so 练功夫 is practicing KungFu, which is correct.
锻炼 literally means 锻造(Forging) and 冶炼(Smelting). Both actions are related to metal production. Most importantly, it means after some processes that are under extremely high temperatures, the quality of the metal is increased. So, usually, 锻炼 means some hardship will be beneficial. Like 锻炼身体(workout) might be tiring, but you are going to be more healthy. It can also be used for some life experiences. For example, 在工作岗位上得到锻炼 means, getting matured while working in a specific position. This position is somewhat challenging. By getting through these challenges, the person is more capable.
If you say 炼功夫, it is like putting your 功夫 under some pressure and see if it can get better. It might be right under some specific situation, but not very commonly used.