Amrita Sher-Gil was born on 30 January 1913 in Budapest, Hungary, to Umrao Singh Sher-Gil Majithia, a Sikh aristocrat and a scholar in Sanskrit and Persian, and Marie Antoniette Gottesmann, a Hungarian-Jewish opera singer who came from an affluent bourgeois family. Her parents first met in 1912, while Marie Antoinette was visiting Lahore. Her mother came to India as a companion of Princess Bamba Sutherland, the granddaughter of Maharaja Ranjit Singh. Sher-Gil was the elder of two daughters; her younger sister was Indira Sundaram (née Sher-Gil), born in March 1914), mother of the contemporary Artist Vivan Sundaram. She spent most of early childhood in Budapest. She was the niece of Indologist Ervin Baktay. Baktay noticed Sher-Gil's artistic talents during his visit to Shimla in 1926 and was an advocate of Sher-Gil pursuing art. He guided her by critiquing her work and gave her an academic foundation to grow on. When she was a young girl she would paint the servants in her house, and get them to model for her. The memories of these Models would eventually lead to her return to India.

Her family faced financial problems in Hungary. In 1921, her family moved to Summer Hill, Shimla, India, and Sher-Gil soon began learning piano and violin. By age nine she along with her younger sister Indira were giving concerts and acting in plays at Shimla's Gaiety Theatre at Mall Road, Shimla. Though she was already painting since the age of five she formally started learning painting at age eight. Sher-Gil started getting formal lessons in the art by Major Whitmarsh, who was later replaced by Beven Pateman. In Shimla Sher-Gil lived a relatively privileged lifestyle. As a child, she was expelled from her convent school for declaring herself an atheist.

In 1923, Marie came to know an Italian Sculptor, who was living at Shimla at the time. In 1924, when he returned to Italy, she too moved there along with Amrita and got her enrolled at Santa Annunziata, an art school at Florence. Though Amrita didn't stay at this school for long and returned to India in 1924, it was here that she was exposed to works of Italian masters.

Sher-Gil's early paintings display a significant influence of the Western modes of painting, especially as practiced in the Bohemian circles of Paris in the early 1930s. Her 1932 oil painting, Young Girls, came as a breakthrough for her; the work won her accolades, including a gold medal and election as an Associate of the Grand Salon in Paris in 1933. She was the youngest ever member, and the only Asian to have received this recognition. Her work during this time include a number of self-portraits, as well as life in Paris, nude studies, still life studied, and portraits of friends and fellow students. The National Gallery of Modern Art in New Delhi describes her self-portraits she made while in Paris as "[capturing] the Artist in her many moods – somber, pensive, and joyous – while revealing a narcissistic streak in her personality."

In 1931 Sher-Gil was briefly engaged to Yusuf Ali Khan, but rumors spread that she was also having an affair with her first cousin and later husband Victor Egan.

When she was in Paris one of her professors often said that judging by the richness of her coloring that Sher-Gil was not in her element in the west, and that her artistic personality would find its true atmosphere in east. In 1933, Sher-Gil "began to be haunted by an intense longing to return to India [...] feeling in some strange way that there lay my destiny as a Painter." Sher-Gill returned to India at the end of 1934. In May 1935, Sher-Gil met the English Journalist Malcolm Muggeridge, then working as Assistant Editor and leader Writer for The Calcutta Statesman. Both Malcolm and Amrita stayed at the family home at Summer Hill, Shimla and a short intense affair took place during which she painted a Casual portrait of her new lover, the painting now with the National Gallery of Modern Art in New Delhi. By September 1935 Amrita saw Muggeridge off as he traveled back to England for new employment. She left herself for travel in 1936 at the behest of an art collector and critic, Karl Khandalavala, who encouraged her to pursue her passion for discovering her Indian roots. In India, she began a quest for the rediscovery of the traditions of Indian art which was to continue till her death. She was greatly impressed and influenced by the Mughal and Pahari schools of painting and the cave paintings at Ajanta.

Later in 1937, she toured South India and produced the famous South Indian trilogy of paintings Bride's Toilet, Brahmacharis, and South Indian Villagers Going to Market following her visit to the Ajanta caves, when she made a conscious attempt to return to classical Indian art. These paintings reveal her passionate sense of colour and an equally passionate empathy for her Indian subjects, who are often depicted in their poverty and despair. By now the transformation in her work was complete and she had found her 'artistic mission' which was, according to her, to express the life of Indian people through her canvas. While in Saraya Sher-Gil wrote to a friend thus: "I can only paint in India. Europe belongs to Picasso, Matisse, Braque.... India belongs only to me". Her stay in India marks the beginning of a new phase in her artistic development, one that was distinct from the European phase of the interwar years when her work showed an engagement with the works of Hungarian Painters, especially the Nagybanya school of painting.

Although from a family that was closely tied to the British Raj, Amrita herself was a Congress sympathiser. She was attracted to the poor, distressed and the deprived and her paintings of Indian villagers and women are a meditative reflection of their condition. She was also attracted by Gandhi's philosophy and lifestyle. Nehru was charmed by her beauty and talent and when he went to Gorakhpur in October 1940, he visited her at Saraya. Her paintings were at one stage even considered for use in the Congress propaganda for village reconstruction. However, despite being friends with Nehru Sher-Gil never drew his portrait, supposedly because the Artist thought he was "too good looking." Nehru attended her exhibition held in New Delhi in February 1937. Sher-Gil exchanged letters with Nehru for a time, but those letters were burned by her parents when she was away getting married in Budapest.

In 1941, at age 28, just days before the opening of her first major solo show in Lahore, she became seriously ill and slipped into a coma. She later died around midnight on 6 December 1941, leaving behind a large volume of work. The reason for her death has never been ascertained. A failed abortion and subsequent peritonitis have been suggested as possible causes for her death. Her mother accused her Doctor husband Victor of having murdered her. However, the day after her death Britain declared war on Hungary and Victor was sent to jail as a national enemy. Amrita was cremated on 7 December 1941 at Lahore.

Sher-Gil married her Hungarian first cousin, Dr. Victor Egan when she was 25. Dr. Egan had helped Sher-Gil obtain abortions on at least two occasions prior to their marriage. She moved with him to India to stay at her paternal family's home in Saraya in Gorakhpur, Uttar Pradesh. Thus began her second phase of painting which equals in its impact on Indian art with the likes of Rabindranath Tagore and Jamini Roy of the Bengal school of art. The 'Calcutta Group' of artists, which transformed the Indian art scene in a big way, was to start only in 1943, and the 'Progressive Artist's Group', with Francis Newton Souza, Ara, Bakre, Gade, M. F. Husain and S. H. Raza among its founders, lay further ahead in 1948. Amrita's art was strongly influenced by the paintings of the two Tagores, Rabindranath and Abanindranath who were the pioneers of the Bengal School of painting. Her portraits of women resemble works by Rabindranath while the use of 'chiaroscuro' and bright colours reflect the influence of Abanindranath.

Sher-Gil's art has influenced generations of Indian artists from Sayed Haider Raza to Arpita Singh and her depiction of the plight of women has made her art a beacon for women at large both in India and abroad. The Government of India has declared her works as National Art Treasures, and most of them are housed in the National Gallery of Modern Art in New Delhi. Some of her paintings also hang at the Lahore Museum. A postage stamp depicting her painting 'Hill Women' was released in 1978 by India Post, and the Amrita Shergil Marg is a road in Lutyens' Delhi named after her. Her work is deemed to be so important to Indian culture that when it is sold in India, the Indian government has stipulated that the art must stay in the country – fewer than ten of her works have been sold globally. In 2006, her painting Village Scene sold for ₹6.9 crores at an auction in New Delhi which was at the time the highest amount ever paid for a painting in India.

Besides remaining an inspiration to many a contemporary Indian artists, in 1993, she also became the inspiration behind the Urdu play Tumhari Amrita.

Sher-Gil's work is a key theme in the contemporary Indian novel "Faking It" by Amrita Chowdhury. Aurora Zogoiby, a character in Salman Rushdie's 1995 novel "The Moor's Last Sigh," was inspired by Sher-Gil. She was sometimes known as India's Frida Kahlo because of the "revolutionary" way she blended Western and traditional art forms.

UNESCO announced 2013, the 100th anniversary of Sher-Gil's birth, to be the international year of Amrita Sher-Gil.