Her father Ranjit Sitaram Pandit was a successful barrister from Kathiawad and classical scholar who translated Kalhana's epic history Rajatarangini into English from Sanskrit. He was arrested for his support of Indian independence and died in Lucknow prison jail in 1944, leaving behind his wife and their three daughters Chandralekha Mehta, Nayantara Sehgal and Rita Dar.
Sahgal's mother, Vijaya Lakshmi Pandit, was a daughter of Motilal Nehru and a sister of India's first prime minister, Jawaharlal Nehru. After India achieved independence, Vijaya Lakshmi Pandit served as a member of India's Constituent Assembly, the governor of several Indian states, and as India's ambassador to the Soviet Union, the United States, Mexico, the Court of St. James, Ireland, and the United nations.
Sahgal attended a number of schools as a girl, given the turmoil in the Nehru family during the last years (1935–47) of the Indian freedom struggle. Ultimately, she graduated from Woodstock School in the Himalayan hill station of Landour in 1943 and later in the United States from Wellesley College (BA, 1947), which she attended along with her sister Chandralekha, who graduated 2 years earlier in 1945. She has made her home for decades in Dehradun, a town close to Landour where she had attended boarding school (at Woodstock).
Sahgal has been married twice, first to Gautam Sehgal and later to E.N. Mangat Rai, a Punjabi Christian who was an Indian Civil Service officer. Rai died aged 87 in 2003 in Dehradun, where Nayantara and he had lived for several decades, in the house once owned by her mother. Selected collection of letters exchanged between Nayantara Sahagal and Rai was published in the book "Relationship". When the book was published in the year 1994, it was received with varying degrees of shock and appreciation. The letters highlight one woman's endeavour to remain true to herself, her writing, her ideals and relationships, both outside and within marriage.
Though part of the Nehru family, Sahgal developed a reputation for maintaining her independent critical sense. Her independent tone, and her mother's, led to both falling out with her cousin Indira Gandhi during the most autocratic phases of the latter's time in office in the late 1960s and throughout the 1970s. Gandhi cancelled Sahgal's scheduled appointment as India's Ambassador to Italy within days of her return to power. Not one to be intimidated, Sahgal in 1982 wrote a scathing, insightful account of Gandhi's rise to power.
Gita Sahgal, the writer and journalist on issues of feminism, fundamentalism, and racism, director of prize-winning documentary films, and human rights activist, is her daughter.
On 6 October 2015, Sahgal returned her Sahitya Akademi Award to protest what she called "increasing intolerance and supporting right to dissent in the country", following the murders of rationalists Govind Pansare, Narendra Dabholkar and M. M. Kalburgi, and the Dadri mob lynching incident.