Rao was born in Telangana on 7 November 1973. Her grandfather was Janumpally J. Rameshwar Rao, Raja of Wanaparthy, Wanaparthy district, Telangana state. In 1992, her parents decided to leave Calcutta so she moved to Bombay with Ajay Goyal. She graduated with a food sciences major from the Sophia College for Women in 1995. She attended the Social Communications Media course at the Sophia Polytechnic for two months, but then quit and left for Delhi. She got her master’s degree at AJK Mass Communication Research Center at Jamia Millia Islamia, New Delhi. Actress Aditi Rao Hydari is Rao’s first cousin.

Rao married actor Aamir Khan in December 2005, after Khan divorced his first wife Reena Dutta in 2002. They met on the sets of Lagaan. Rao was one of the film’s assistant directors. They now live in Bandra, a Mumbai suburb. The couple have a son, Azad Rao Khan (born on 5 December 2011), who has been named after Abdul Kalam Azad. She is an atheist.

She scripted and directed the film Dhobi Ghat, which was released in January 2011 under Aamir Khan Productions. She has started writing her next film which will have roots in Kolkata.

Kiran Rao was made the chairperson of the Mumbai Film Festival – MAMI in 2015. She also sang a Marathi song ‘Toofan Aalaya’, the Satyamev Jayate Water Cup Anthem