Desai, daughter of novelist, and three-time Booker Prize nominee, Anita Desai, had been one of the favorites for the $93,000 prize.
"To my mother, I owe a debt so profound and so great that this book feels as much hers as it does mine," said Desai, dressed in a traditional Indian sari, as she accepted her award. "It was written in her company and in her witness and in her kindness."
Desai revealed that her mother was too nervous to attend the award ceremony, and remained in an Indian village without access to a television or telephone.
Judges deliberated for two hours before making their decision, hailing Desai's work as "a magnificent novel of humane breadth and wisdom, comic tenderness and powerful political acuteness."
"The remarkable thing about Kiran Desai is that she is aware of her Anglo-Indian inheritance — of (V.S.) Naipaul and (R.K.) Narayan and (Salman) Rushdie — but she does something pioneering," said Hermione Lee, chairman of the judges.
"She seems to jump on from those traditions and create something which is absolutely of its own. The book is movingly strong in its humanity and I think that in the end is why it won."
"The Inheritance of Loss," which took Desai eight years to complete, tells parallel stories set in post colonial India and the United States. In the foothills of the Himalayas, a Cambridge University-educated Indian judge spends his time as a recluse until his orphaned teenage granddaughter comes to stay.
Meanwhile his cook's son, who has gone to the United States to seek his fortune, ekes out an existence as an illegal immigrant in New York restaurant kitchens.
The 35-year-old held off the challenge of five other nominees, including favorite Sarah Waters and her novel, "The Night Watch," a story of love and loss during World War II. The other finalists were "In the Country of Men," Hisham Matar's semi-autobiographical first novel about childhood in Moammar Gadhafi's Libya; "The Secret River," Kate Grenville's tale of life in a 19th-century Australian penal colony; "Carry Me Down," the story of an unusual boy, by Irish-Australian novelist M.J. Hyland; and "Mother's Milk," a portrait of a rich but dysfunctional family by English writer Edward St. Aubyn.
Desai, educated in India, England and the United States, published her first novel, "Hullabaloo in the Guava Orchard," in 1998. "The Inheritance of Loss" is her second book.