In 1965, Air-Mshl. Khan reportedly was in conflict with the army department led by its army commander General Musa Khan when he questioned the contingency plans and secret infiltration into the Indian held side of Kashmir. Air-Mshl. Khan reported that neither the Air Force nor the Pakistan Navy was kept informed by military planners when the Indo-Pakistani War of 1965 (the second war with India) broke out. Before the declaration of war by either side, Air-Mshl. Khan reportedly spoke with Air-Mshl. Arjan Singh, the Indian Air Force's Chief of the Air Staff, where both reached a mutual understanding for avoiding bombardment of each sides residential cities.
In August 1965, President Ayub Khan reportedly refused to approve Air-Mshl. Asghar Khan's extension papers for a third term and Khan was replaced in his command when Air Vice Marshal Nur Khan was appointed to the post. By the time Air-Mshl. Asghar was replaced from his command appointment, the Pakistan Air Force had been a formidable branch of the armed forces.
After retiring from his military service, Asghar Khan announced he was forming a political party, the Tehrik-e-Istiqlal (TeI) (lit. Movement for Solidarity Party), in response to Zulfikar Ali Bhutto's announcement of the formation of the Pakistan Peoples Party (PPP). The TeI was a centrist political party founded in direct opposition to the left-wing PPP, though both were opposing the Ayub administration. Despite its centerist and secular program, the TeI attracted the right-wing conservative vote bank and support from the Muttahida Majlis-e-Amals ultraconservative clergy. During the election campaign in 1969–70, Khan placed the blame on Zulfikar Ali Bhutto for starting the second war with India in 1965 after reading a statement from Ayub Khan after meeting the latter.