Bhatt was born to Nanabhai Bhatt and Shirin Mohammad Ali. Bhatt's father was a Hindu Gujarati Brahmin and his mother was a Gujarati Muslim of Dawoodi Bohra background.

Among his siblings is the Indian film producer Mukesh Bhatt. Bhatt did his schooling from Don Bosco High School, Matunga. While still in school, Bhatt started summer jobs to earn money, while also making product advertisements. He was introduced to film director Raj Khosla through acquaintances. Bhatt thus started as assistant director to Khosla. Bhatt married his first wife Kiran (born Lorraine Bright) whom he had met while still a student. His romance with her was the inspiration for his film Aashiqui. Bhatt and Kiran had two children (Pooja Bhatt and Rahul Bhatt) but his marriage stumbled following the difficulties of his early career. Bhatt later fell in love with actress Soni Razdan and married her.

At the age 26, Bhatt made his debut as a director with the film Manzilein Aur Bhi Hain in 1974. His 1979 Lahu Ke Do Rang, starring Shabana Azmi and Vinod Khanna in lead roles, won two Filmfare Awards in 1980: Helen received her first Filmfare as Best Supporting Actress and Madhukar Shinde won it for Best Art Direction. The film did "above average" at the box office. He was noticed and received great critical acclaim with art film Arth (1982), when he turned to his personal life for inspiration but doubt persists as to whether it is an original film. Later, he made many more films taking insights from his personal life wherein he highlighted personal narratives ranging from out-of-wedlock birth, to extramarital affair, and created critically acclaimed works such as Janam (1985) and Saaransh (1984), an exploration of an old couple's anxieties in a universe governed by arbitrary violence, (1986).

Bhatt had one of his biggest releases with musical romance film Aashiqui (1990), in collaboration with T-Series. The film launched Rahul Roy, Anu Agarwal and Deepak Tijori in the lead roles and became a major commercial success due to the hugely popular soundtrack by Nadeem-Shravan, which catapulted the music director duo into stardom. He launched his daughter Pooja Bhatt as a lead actress opposite Aamir Khan in Dil Hai Ki Manta Nahin (1991). The film was a commercial success and hugely acclaimed for its soundtrack. Bhatt's directorial Saathi (1991) was the only major success for Aditya Pancholi as a lead actor, thus giving a boost to his career. It was the biggest hit of the actor's career.

Bhatt's biggest release during that time was Sir (1993). The film launched Atul Agnihotri opposite Pooja Bhatt and Naseeruddin Shah was featured in the title role of an aspiring and dedicated teacher. The film was a commercial success and gained critical acclaim for Bhatt's direction and the acting of Shah, Pooja, Agnihotri and Paresh Rawal. The film had an acclaimed and popular soundtrack by Anu Malik, which gave a boost to the music director's stellar career and he joined the league of top music directors of Bollywood.

In 1995 he moved to television, then a newly opening medium in India. He made two TV series in 1995: the English language A Mouthful of Sky written by Ashok Banker and the popular Hindi language serial Swabhimaan scripted by writer Shobha De. He directed another TV series, Kabhie Kabhie, in 1997 which was written by Anurag Kashyap, Vinta Nanda and Kamlesh Kunti Singh. He is known to have copied many Hollywood movies into mainstream Hindi movies without even acknowledging it. For example, Fugitive was remade in Hindi as Criminal. He has many times copied portion of Hollywood movie scene and enacts into his films. Following this, he directed dramas like Dastak (1996), the debut film of Miss Universe 1994-turned-actress Sushmita Sen, and Tamanna (1997), and tried his hand at comedy with Duplicate in 1998. Zakhm (1998) based on the Mumbai riots of 1993.

His last film as director was Kartoos (1999). Thereafter, Bhatt retired a director and took to screenwriting, churning out stories and screenplays for over twenty films, many of which were box-office successes, like Dushman, Raaz, Murder (2004), Gangster (2006), Woh Lamhe (2006), based on the life of actress Parveen Babi, along with many more. His banner vishesh films still continues operating today as one of Indian Cinemas leading production banners. Bhatt entered into the world of theatre with his protege Imran Zahid as of now he has produced three plays.The Last Salute, based on Muntadhar al-Zaidi's book of the same title, a journalist investigating atrocities Trial of Errors, that opened on 29 March 2013 in Delhi. stage adaptation of Bhatt of his movie, Arth (film)., Bhatt also produced The Last Salute, a play directed by Arvind Gaur, based on Muntadhar al-Zaidi's book, starring Imran Zahid.

Bhatt is co-owner of film production house, Vishesh Films, with Mukesh Bhatt. He is a member of the advisory board of U.S. nonprofit TeachAIDS.

He has hosted some episodes of two science magazine programmes - Turning Point and Imaging Science on Doordarshan in 1990s.^[20]

Bhatt believes the Congress party is committed to secularism. In the 2014 Lok Sabha elections, he campaigned in a Karvan-e-Bedari (caravan of awareness) asking people to vote for Congress^[21] and defeat BJP's Prime Ministerial candidate Narendra Modi, as he believes that Mr. Modi is communal.^[22] Bhatt also criticizes the communal record of Congress Party, for its role in 1984 Sikh genocide. He is planning to make a film, which will address the 1984 Sikh genocide that took place in Delhi.^[23]

Bhatt fell in love with Lorraine Bright and got married when he was 20 years old. Bright changed her name to Kiran Bhatt.^[3] The couple have two children, a daughter Pooja Bhatt, a former actress, now a producer, and a son Rahul Bhatt, an aspiring actor. The marriage ended when Bhatt had an affair with the glamorous actress of the 1970s, Parveen Babi.^[3] The affair did not last long. Bhatt later married Soni Razdan in 1986.^[3][24] The couple have two daughters, Shaheen Bhatt and Alia Bhatt. Emraan Hashmi is his cousin Anwar Hashmi's son and thus his nephew.

In the 1970s, he became a follower of Osho, and later found spiritual companionship and guidance with philosopher, U.G. Krishnamurti. Bhatt calls Krishnamurti his lifeline and says "Take him away, and I am empty".^[3] Bhatt in 1992 wrote Krishnamurti's biography titled U.G. Krishnamurti, A Life.^[25] Apart from this he has edited several books based on conversations with U.G. Krishnamurti. Bhatt's latest book A Taste of Life: The Last Days of U.G. Krishnamurti was published in June 2009.^[26]

As a director and producer, Mahesh Bhatt has a legacy of mentoring many actors and actresses and launching their careers, giving big names to Bollywood. He is notable for launching the careers of Anupam Kher in Saaransh (1984), Rahul Roy, Anu Agarwal and Deepak Tijori in Aashiqui (1990), daughter Pooja Bhatt in Dil Hai Ki Manta Nahin and Sadak (1991), Atul Agnihotri in Sir (1993), Sonali Bendre in Naaraaz (1994), Samir Soni in A Mouthful of Sky (1995), Sharad Kapoor, Sushmita Sen and Mukul Dev in Dastak (1996), Ashutosh Rana in Tamanna (1997), Manoj Bajpayee in Dastak (1996) and Tamanna (1997). Dushman (1998) and Sangharsh (1999), Aftab Shivdasani in Kasoor (2001), Dino Morea and Bipasha Basu in Raaz (2002), Aparna Tilak in Footpath (2003), Emraan Hashmi in Footpath and Murder (2004), Mallika Sherawat in Murder (2004), Kunal Khemu in Kalyug (2005), Shiney Ahuja and Kangana Ranaut in Gangster and Woh Lamhe (2006).^[27]

Bhatt has also given breakthrough to many stars, bringing turning point in their careers. These names include Sanjay Dutt and Kumar Gaurav in Naam (1986), Aditya Pancholi in Saathi (1991), Aamir Khan in Dil Hai Ki Manta Nahin (1991), Juhi Chawla in Hum Hain Rahi Pyar Ke (1993), which also fetched her Filmfare Award for Best Actress and Paresh Rawal in Sir (1993).^{[citation needed]}

Bhatt is also known for his choice of music. Many composers had their first mainstream success in Bollywood while working with him. Nadeem-Shravan had their first hit album in Bollywood with Bhatt's directorial Aashiqui, which established them as the biggest music directors for the next decade. They would collaborate with Bhatt in many films to create successful soundtracks. Examples include Dil Hai Ki Manta Nahin, Sadak and Saathi (1991), Junoon (1992), Tadipaar and Hum Hain Rahi Pyar Ke (1993). Nadeem-Shravan went on to compose music for several productions of Vishesh Films.

Anu Malik had a stellar career as a music director going into the 1990s. He composed music for Bhatt's directorial Phir Teri Kahani Yaad Aayee (1993). The soundtrack became successful and the success of Bhatt and Malik continued with another hit soundtrack in Sir (1993), thus catapulting Malik as one of the top music directors of Bollywood. Malik composed music for many of Bhatt's movies including Naaraaz (1994), Naajayaz (1995), Tamanna (1997) and Duplicate (1998) and would remain a composer for many of Vishesh Films' movies during the 2000s.

Pakistani singer Atif Aslam got his first break in Bollywood when his songs "Woh Lamhe" and "Aadat" were used in Bhatt's movies. Aslam rose to stardom in India and went on to become a famous and successful playback singer for Bollywood movies.

Bhatt has frequently cast major names including Naseeruddin Shah, Mithun Chakraborty, Aamir Khan, Juhi Chawla, Shahrukh Khan, Pooja Bhatt, Atul Agnihotri, Ashutosh Rana, Sonali Bendre, Rahul Roy, Manisha Koirala, Jackie Shroff and Emraan Hashmi in his films.