Vidya was born on 1 January 1979 in Bombay (present-day Mumbai), to parents of Tamilian descent. Her father, P. R. Balan, is the executive vice-president of Digicable and her mother, Saraswathy Balan, is a homemaker. According to Vidya, they speak a mix of Tamil and Malayalam at home. Her elder sister, Priya Balan, works in advertising. The actress Priyamani is her second cousin.

While pursuing her master’s degree, Vidya was cast as the female lead in the Malayalam film Chakram, opposite Mohanlal and was subsequently signed on for 12 other Malayalam language films. However, due to production difficulties, Chakram was shelved. The postponement of a film starring Mohanlal was an unheard occurrence in Malayalam cinema and producers blamed Vidya for bringing “bad luck” to the project; labelled her as a “jinx”; and replaced her in the films that she had been contracted for. She shifted focus to Tamil cinema. In 2001, she was cast as the female lead in N. Linguswamy’s Run (2002). However, after completing the first shooting schedule, she was unceremoniously dropped and replaced by Meera Jasmine. She was signed up under false pretences for a sex comedy, a genre she was uncomfortable with, and decided to leave the project. Thereafter, she signed on for a third Tamil film, Manasellam (2003), but was replaced by Trisha as the director was dissatisfied with her work. Kalari Vikraman, another Malayalam film that she completed work for in 2003, failed to get a theatrical release. After failing to start a film career, Vidya appeared in approximately 60 television commercials and in music videos for Euphoria and Shubha Mudgal; a majority of these were directed by Pradeep Sarkar.

Vidya’s career prospects improved in 2009 when R. Balki cast her in his comedy-drama Paa. She played a single mother struggling with her son’s (played by Amitabh Bachchan) progeria. She was initially skeptical about playing the part, wondering if she could be maternal towards an actor of Bachchan’s stature, who is over 30 years her senior. After insisting on a look test with Bachchan, she said that his effective transformation into a young boy had convinced her to accept the part. Comparing her acting style to that of Dimple Kapadia, the critic Sukanya Verma wrote, “Balan is poignant yet restrained and projects an impressive figure of grace and integrity”; Nikhat Kazmi of The Times of India commended her for lending a “rare dignity to the image of the Bollywood mom”. Paa was a commercial success, and won Vidya the Filmfare Award and Screen Award for Best Actress. Vidya has said that the film’s reception gave her “courage to stick to my conviction”.

The mass media has often speculated about a romantic relationship between Vidya and her co-actors, but she has strongly denied these reports. In 2009, Vidya was involved in a controversy when she mentioned a previous relationship in which “caustic remarks” were made at her due to her weight. She said, “If someone who matters to you takes you down, it can break you. That someone whose approval mattered to me started to constantly find faults with me. At that point of time, it was important to walk away from that relationship.” Though she refused to name the person, tabloid reports suggested that she was referring to Shahid Kapoor (her co-star in Kismat Konnection). Kapoor, however, denied the allegations. During an interview in May 2012, Vidya announced that she was dating Siddharth Roy Kapur, the CEO of UTV Motion Pictures. On 14 December 2012, the couple were married in a private ceremony in Bandra, Mumbai.

The year 2011 was key in Vidya’s career, as she had starring roles in two commercially successful female-led films. In No One Killed Jessica, a thriller based on the murder of Jessica Lal, and co-starring Rani Mukerji, Vidya played the real-life character of Sabrina, who seeks justice for her sister’s murder. Vidya was styled in men’s dresses and loose-fitted clothing; several scenes were shot on location using hidden cameras, and she was pleased with the anonymity that her styling provided. Moreover, she spoke positively of her rapport with Mukerji, noting the rarity of two leading ladies within the same Hindi film. Sudhish Kamath of The Hindu took note of Vidya’s ability to be “in sublime control over her emotions” and Savera Someshwar of Rediff.com added that “her hesitant body language, her faith, her helplessness, her rage, her sorrow and her gratitude all come across beautifully”. Vidya earned another Filmfare nomination for Best Actress. In the same year, she made a guest appearance in the Malayalam film Urumi and a retrospective of her films was held in Australia as part of the Bollywood and Beyond festival.

Vidya is trained in Carnatic music and briefly studied the dance forms of Bharatnatyam and Kathak. Regarding her religious affiliations, Vidya said, “I am a person with a lot of faith and I have conversations [with God] all the time but I am not so religious in the conventional, organised sense”. She practices vegetarianism and was listed as “India’s hottest vegetarian” in polls conducted by PETA in 2011 and 2012. Her weight fluctuations over the years have been the subject of substantial media coverage in India.

In March 2011, Vidya endorsed World Wildlife Fund’s Earth Hour campaign in India. She campaigned for the cause of nutrition in India for Child In Need Institute (CINI), a non-profit organisation based in Kolkata. In September 2012, Vidya visited a village in Mirzapur, Uttar Pradesh, where she participated in a campaign to promote children’s education and the empowerment of women. For her attempts to empower women, Vidya was awarded the Prabha Khaitan Puraskar 2012 by the Calcutta Chamber of Commerce; she was the youngest recipient of the award. In 2012, she became the first brand ambassador of the country’s sanitation programme, later renamed as the Swachh Bharat Abhiyan. Since then, she has been part of a nationwide television and radio campaign aimed to increase construction and use of toilets.

India Today featured Vidya in their 2012 listing of the nation’s most powerful women and noted that “she has toppled the all dominating hero, reducing him to a supporting role in a male dominated film industry”. Vidya was featured by Forbes India in their annual Celebrity 100 list in 2012 and 2013. She occupied the top slot in Rediff.com’s annual listing of the year’s best performances for two consecutive years (2010–11). She also featured in the list for the years 2005, 2006, 2009, 2012, and 2016. In 2012, the magazine Verve featured her as one of India’s “Young Power Women” and wrote, “In a reel world peopled by size zero-toned bodies and pretty-as-a-picture heroines, Vidya comes across as completely real and natural – a woman who has followed her own instincts and dared to live her destiny by being her own person and not morphing herself to fit into any conventional slot.” Two years later, the magazine listed her as a power icon. In 2018, The Economic Times considered Vidya to be one of the most prominent celebrity brand ambassadors in India.

In 2013, Vidya served as the grand marshal of the India Day parade held in New York City. In the same year, she launched a technology-based learning platform for underprivileged children in the Thanapur village of Uttar Pradesh. Also that year, Vidya featured as the host of No More Kamzor, a television special on women empowerment. On the occasion of International Women’s Day in 2015, Vidya wrote an opinion column in Hindustan Times on the issues faced by women in India. In August 2017, Vidya was made a member of the Indian Central Board of Film Certification, to certify films for theatrical exhibition. The following year, she became the goodwill ambassador of Arpan, an NGO that creates awareness on sexual abuse. In 2019, she collaborated with BIG FM 92.7 to host a radio show named “Dhun Badal Ke Toh Dekho”.

In 2014, Vidya was awarded the Padma Shri, the fourth highest civilian award in India, for her contributions to the entertainment industry. The following year, she received an honorary Doctor of Arts degree from Rai University; the university also named a scholarship program for underprivileged girls after her. The chancellor of the university, Harbeen Arora said, “Among the league of iconic actors, Vidya is a pioneer in every way. Her films epitomise a distinct Indianness and a powerful womanhood”.

Vidya expanded into South Indian cinema in 2019, with roles in the two-part Telugu biopic, titled N.T.R: Kathanayakudu and N.T.R: Mahanayakudu (2019), and the Tamil drama Nerkonda Paarvai. In the former two, which form the biographical account of actor-politician N. T. Rama Rao, she played Rao’s first wife. Both films failed commercially. In Nerkonda Paarvai, a remake of the courtroom drama Pink (2016), she briefly played the wife of Ajith Kumar’s character. Although not keen on remakes, she agreed to the project to bring attention to its theme of sexual consent. Srinivasa Ramanujam of The Hindu thought that the portions involving Vidya were inessential to the story. It emerged as one of the highest-grossing Tamil films of the year.