Lakshmi was born in Nellore, Andhra pradesh and brought up in Chennai, Tamil Nadu, to veteran Telugu film maker Yaragudipati Varada Rao of Nellore, Andhra Pradesh, whose films dealt with important social issues.Her mother Kumari Rukhmini was a Tamil actress, whose mother Nungambakkam Janaki was also an actress
Lakshmi was married thrice. Her first marriage was to Bhaskar in 1969, a Malayali, who worked with an insurance company and the couple have a daughter, Aishwarya, was born in 1971. Later She married Mohan Sharma in 1975 which also ended up in divorce in 1980.She was long associated with Kannada actor Ananth Nag in the 1980s.
While she was shooting En Uyir Kannamma, She and actor-director K.S. Sivachandran fell in love and got married in 1989. Lakshmi adopted a baby girl in 2000 and named Samyuktha