After studying in Kishore Namit Kapoor Acting Institute in Mumbai, Khanna made his acting debut in Bollywood in 1997 with the movie Himalay Putra, which was produced by his father and went without much success at box office. His performance in his next release, J. P. Dutta-directed Border (1997), earned him the Filmfare Best Debut Award and a nomination for Filmfare Award for Best Supporting Actor in 1998. After that a string of unsuccessful films followed such as Mohabbat (1997), Kudrat (1998), Laawaris (1999), Love You Hamesha (1999) and Dahek (1999).

In 1999, he starred in Rishi Kapoor's Aa Ab Laut Chalen; though the film did average Business, he was praised for his acting. He next starred in Subhash Ghai's Taal opposite Aishwarya Rai. The film became a critical and commercial success.

In 2001, Khanna appeared in Farhan Akhtar's cult classic Dil Chahta Hai. This marked a turning point in his career: the film was a commercial and critical success and Khanna's performance was particularly applauded, later validated by Filmfare Award for Best Supporting Actor in 2002. Dil Chahta Hai relaunched Akshaye Khanna and Saif Ali Khan's careers.

In 2002, Khanna appeared in an Abbas-Mustan thriller Humraaz; his role as a convincing con-artist in this film earned him much critical acclaim and a nomination for a Filmfare Award for Best Performance in a Negative Role. Khanna then plunged into the comedy genre with Priyadarshan’s Hungama (2002) and Hulchul (2004) that became box office hits.

After acting in a string of unsuccessful and lukewarm box-office films like Shaadi Se Pehle (2006), Aap Ki Khatir (2006), Salaam-e-Ishq: A Tribute to Love (2007), Mere Baap Pehle Aap (2008), Gandhi, My Father (2007), and Naqaab (2007), Khanna appeared in the 2008 release Race. The Abbas-Mustan thriller was the fourth highest-grossing Bollywood film in 2008 and Khanna's performance in a negative role brought him awards in the Best Villain category. However, Khanna’s portrayal of Harilal Gandhi, Mahatma Gandhi's eldest son, in the critically acclaimed 2007 film Gandhi, My Father is unanimously acknowledged his best performance yet as an actor.

In 2010, Khanna's first release was Anees Bazmee's comedy film No Problem with Sanjay Dutt, Anil Kapoor and Kangana Ranaut, followed by Aakrosh alongside Ajay Devgn. Both of these films flopped at the box office. He then starred in Tees Maar Khan the same year, which went on to become a box office success.

In 2012, Khanna starred in the comedy drama Gali Gali Chor Hai, which was also a box office flop. After this, Khanna took a four-year break from acting. In 2016, he made his comeback as an antagonist in the action-comedy film Dishoom. The film received a mixed response and did average Business at the box office. In 2017, Khanna appeared as an investigative cop in two separate thrillers, the dramatic Mom and the mystery film Ittefaq. Mom received critical acclaim, it turned out to be a box office success, and Khanna's performance was highly appreciated.

Akshaye Khanna, in 2013, reported a case of a couple duping him of ₹50 lakh for doubling this amount in 45 days through commodity trading to the police tt.