Lillete was born in Pune as Lillete Kiswani to a Sindhi Hindu family. Her father, Govind Kiswani, was an engineer with the Indian Railways, and her mother, Leela, was a gynaecologist who worked with the Indian Army. The widespread belief that Lillete is a Christian or of mixed-race parentage is totally incorrect. Her father wanted to give her a "modern" sounding name, and came up with "Lillete" as a faux-French derivation of her mother's name, Leela, with the intended meaning being "little Leela." Lillete, however, never liked her name "from day one" due to personal reasons, such as getting made fun of when she was younger.
Lillete did her schooling from various educational institutions (as a consequence of her father's transferable job), among them Carmel Convent (Delhi) and St. Mary's (Pune). She graduated in English Literature from Lady Shri Ram College (Delhi) and subsequently obtained two post-graduation degrees — in English and in Mass Communication.
Lillete is the eldest of three siblings. She has a sister, Lushin, (named after Ilyushin, a Russian aircraft), and a brother, Patanjali, named in honour of the ancient rishi who compiled the Yoga Sutras. Lushin is the wife of Pradeep Dubey, a noted academic.
Lillete has appeared in numerous movies, including Mira Nair's Monsoon Wedding co-starring Nasiruddin Shah, Kal Ho Naa Ho which starred Shah Rukh Khan, Preity Zinta, Saif Ali Khan and Jaya Bachchan, Baghban alongside Amitabh Bachchan, Bow Barracks Forever alongside her daughter Neha Dubey, and Housefull alongside Akshay Kumar and Deepika Padukone.
Lillete also played a role in the British film The Best Exotic Marigold Hotel as well as its sequel, both of which starred Maggie Smith, Judi Dench, Bill Nighy and Dev Patel, among others.
Lillete is also an acclaimed theatre director, television and film artist, and was part of the Theatre Action Group (TAG) in Delhi. She has directed a number of plays, most notable being Mahesh Dattani's Dance Like a Man, which is the longest running Indian play in English, having completed 497 shows across the world, including a two-week run on the Broadway.
Lillete's husband Ravi Dubey was the youngest-ever General Manager of the Taj Mansingh hotel and rose to be the Senior Vice President of Corporate Communications at the Tata Group before he quit in 2004. He died of pancreatic cancer in 2015.
The couple has two daughters, Neha and Ira, both of whom have played a variety of small and supporting roles in theatre, film and television. Additionally, Neha is a psychotherapist with an independent practice in Mumbai.