Born in Peshawar, Anand studied at Khalsa College, Amritsar, graduating with honours in 1924, before moving to England, where, while working in a restaurant because of poverty, he attended University College London as an undergraduate and later Cambridge University, earning a PhD in Philosophy in 1928, his dissertation being "Bertrand Russell and the English Empiricists." During this time he forged friendships with members of the Bloomsbury Group. He spent some time in Geneva, lecturing at the League of Nations' School of intellectual corporation.

Inevitably, Anand, who in the 1930s and '40s spent half his time in London and half in India, was drawn to the Indian independence movement. During his time in London, he wrote propaganda on behalf of the Indian cause alongside India's Future Defence Minister V. K. Krishna Menon, while trying to make a living as a Novelist and Journalist. At the same time, he also supported freedom elsewhere around the globe and even travelled to Spain to volunteer in the Spanish Civil War, even though his role in the conflict was more journalistic than military. He spent World War II working as a scriptwriter for the BBC in London, where he became a friend of George Orwell. Orwell penned a favourable review of Anand's 1942 novel The Sword and the Sickle and remarked that "although Mr. Anand's novel would still be interesting on its own merits if it had been written by an Englishman, it is impossible to read it without remembering every few pages that is also a cultural curiosity," adding that the growth "of an English-language Indian literature is a strange phenomenon". He was also a friend of Picasso and had Picasso paintings in his collection.

Anand's literary career was launched by family tragedy, instigated by the rigidity of the caste system. His first prose essay was a response to the suicide of an aunt, who had been excommunicated by her family for sharing a meal with a Muslim woman. His first main novel, Untouchable, published in 1935, was a chilling expose of the day-to-day life of a member of India's untouchable caste. It is the story of a single day in the life of Bakha, a toilet-cleaner, who accidentally bumps into a member of a higher caste.

Anand met an English Actress, Kathleen Gelder, whom he married in 1939. They had a daughter, Sushila. In 1948, they divorced.

Anand returned to India in 1946, and continued with his prodigious literary output there. His work includes poetry and essays on a wide range of subjects, as well as autobiographies, novels and short stories. Prominent among his novels are The Village (1939), Across the Black Waters (1939), The Sword and the Sickle (1942), all written in England, and Coolie (1936), The Private Life of an Indian Prince (1953), perhaps the most important of his works written in India. He also founded a literary magazine, Marg, and taught in various universities. During the 1970s, he worked with the International Progress Organization (IPO) on the issue of cultural self-comprehension of nations. His contribution to the conference of the IPO in Innsbruck (Austria) in 1974 had a special influence on debates that later became known under the phrase of "Dialogue Among Civilizations". Anand also delivered a series of lectures on eminent Indians including Mahatma Gandhi, Jawaharlal Nehru and Rabindranath Tagore, commemorating their achievements and significance and paying special attention to their distinct brands of humanism.

His 1953 novel The Private Life of an Indian Prince was more autobiographical in nature. In 1950 Anand embarked on a project to write a seven-part autobiography, beginning in 1951 with Seven Summers. One part, Morning Face (1968), won him the Sahitya Akademi Award. Like much of his later work, it contains elements of his spiritual journey as he struggles to attain a higher sense of self-awareness.

Anand died of pneumonia in Pune on 28 September 2004 at the age of 98.