Lakshmi was born on December 13, 1952 in Madras, Tamil Nadu, India to a show business family. Her father Y.V. Rao, originally from Nellore, Andhra Pradesh, was an noted filmmaker and actor whose films dealt with important social issues. Her mother Kumari Rukmini was a Tamil actress, whose mother Nungambakkam Janaki was also an actress. She was fifteen when she started acting in films. Her first film was a Tamil film titled "Jeevanamsam" in 1968. She became a star in South India in the 1970s and acted in all four South Indian languages in which she is fluent: Tamil, Telugu, Malayalam and Kannada. Her Malayalam hit Chattakkari (1974) was remade in Hindi as Julie (1975) and in Telugu as "Miss Julie Prema Katha" (1975). "Julie" became a hit, and Lakshmi received the Filmfare Best Actress Award and the Bengal Film Journalists' Association Award for "most outstanding work of the year." After her success in "Julie," however, she didn't star in many Hindi films and instead concentrated on doing more South Indian films. She won the National Film Award for Best Actress for the Tamil film Sila Nerangalil Sila Manithargal (1977), becoming one of the first South Indian actresses to win in that category for a Tamil film. When her career as a leading lady ended in the 1980s, she started playing supporting roles as mother and later as grandmother. She played grandmothers to Aishwarya Rai Bachchan in Jeans (1998) and Kareena Kapoor in Hulchul (2004). She has performed in more than 400 films. She has also been involved in politics.

Lakshmi took a break from acting to host two talk shows, including the Tamil talk show "achamillai, achamillai". After the talk shows ended, she returned to acting in films.

Lakshmi was married three times. Her first marriage was to Baskar, which was arranged by her parents when she was seventeen. Her only biological child, Aishwariyaa Bhaskaran, was born in 1971. Her marriage ended in divorce, and she gained custody of her daughter, who later became an actress in the 1990s, carrying on the family tradition. Lakshmi fell in love with her _Chattakkari (1974)_ leading man Mohan, but that relationship ended. While she was shooting En Uyir Kannamma (1988), she and actor-director K.S. Sivachandran fell in love and got married. She adopted a baby girl in 2001. Her daughter Aishwariyaa Bhaskaran gave birth to a baby girl in the mid 1990s, making Lakshmi a grandmother.