Khan made a cameo appearance in Asim Raza's coming-of-age film, Ho Mann Jahaan, in January 2016. He then had a supporting role in Shakun Batra's family drama, Kapoor & Sons. The film, which featured Khan as part of an ensemble cast including Rishi Kapoor, Ratna Pathak Shah, Rajat Kapoor, Sidharth Malhotra, and Alia Bhatt, was a commercial success. The actor received near-unanimous critical praise for his portrayal of Rahul Kapoor, a closeted homosexual writer. A Bollywood Hungama reviewer enjoyed Khan's performance, saying that his character creates an emotional connection with the audience, and NDTV film critic Saibal Chaterjee praised his self-assured performance. Kapoor & Sons earned Khan the Diversity Award at the Indian Film Festival of Melbourne and a nomination for Best Supporting Actor at the 62nd Filmfare Awards. According to the film's producer, Karan Johar, "We went to six actors and after six rejections, I told Shakun Batra (director) that we should drop the idea and he started developing another screenplay. Later, in a flash of thought Fawad came to my mind. I sent him the script, he loved it and said he would do it." In September 2016, Johar said that Khan's wife pressured him to accept the role.
Later in 2016, Khan appeared in a small role with Ranbir Kapoor, Anushka Sharma, and Aishwarya Rai Bachchan in Karan Johar's romantic drama, Ae Dil Hai Mushkil. Raja Sen of Rediff.com found his role "far too little to justify the ridiculous kerfuffle his casting had caused", but called him the perfect choice for the part. In Deccan Chronicle Subhash K. Jha described Khan's role as "meagre and sketchy". After the 2016 Uri attack, relations between India and Pakistan deteriorated; the Indian Motion Picture Producers Association (IMPPA) and the Film Producers Guild of India banned Pakistani artists from working in India until the situation normalised.
Khan is one of the highest-paid actors in the Pakistani film industry. According to director and producer Abdullah Kadwani, "Fawad is the closest actor to Waheed Murad." Soon after the release of Khoobsurat, The Indian Express's Mimansa Shekhar wrote that the actor redefined the Bollywood actor with charm, replacing "stereotype body builders with six packs". After the success of Kapoor & Sons, Nirmalya Dutta of Daily News and Analysis called Khan's portrayal of a gay male "a big leap forward for India's LGBT movement"; in India, where homosexuality was illegal at that time, "Khan had the guts and gumption to play this seminal role." In August 2016, Ranbir Kapoor said that Khan opened a door by playing a gay man and he was now comfortable playing such a role.
The Herald named Khan one of its 10 People of 2016. He was ranked the fifth-most-popular Bollywood actor of November 2014, and was called the most popular Bollywood actor in March 2016 by Times Celebex. MenXP ranked Khan 37th on its Most Popular Bollywood celebrities of 2014 list. He was the first Pakistani to appear on the cover of Filmfare magazine, in September 2014, and again appeared on its cover in October 2015 and March 2016. Hi! Blizt magazine featured Khan on its cover in 2016. He received the Best Male Debut Award at the IBNlive Movie Awards, with 48.54 percent of the vote.