She was the only child of Mohammad Reza Shah and his first wife, Fawzia, an Egyptian princess. Her birth caused considerable dismay in the Pahlavi family due to a prophecy that foretold dire consequences if the royal family's first child was a girl. A male heir had been highly anticipated, and celebrations were planned accordingly, but were abruptly cancelled when Shahnaz's birth was announced.Despite her disappointment, her father found some solace in her name, Shahnaz, which means the king's pride. However, the event put a strain on Princess Fawzia's position within the royal family, leading to increasing hostility from family members and emotional neglect from her husband. These circumstances contributed to Fawzia's severe depression, which eventually led her to return to Egypt in May 1945 and file for divorce when Shahnaz was only five years old.

Although her father asked her to remain in Tehran until her mother returned, the Iranian authorities initially refused Fawzia's request for a divorce. After her departure, Shahnaz became a propaganda tool, as her father and Aunt Ashraf sought to maintain public interest in her through media coverage. Fawzia's divorce was officially recognized on November 17, 1948, with Iranian officials citing climate-related health concerns as the reason for the separation. One of the terms of the divorce was that Shahnaz would remain in Iran. As a result, Shahnaz grew up largely without her mother, while her father focused on finding a new wife. This left her feeling isolated, compounded by a strained relationship with her grandmother, who disapproved of her mother. Fortunately, Shahnaz had the support of her aunt, Shams Pahlavi, and attended kindergarten in Tehran, followed by a specialized elementary school established for her. At the age of eight, Shahnaz moved to Switzerland to attend boarding school, where she spent five years with limited visits from her father but frequent visits from her mother. After completing her studies, she moved to the United States, reuniting with her aunt and the Empress Dowager Taj Mahal. In February 1951, after her father married Soraya, Shahnaz became her stepdaughter. Although Soraya tried to bond with Shahnaz, negative influences from her family affected their relationship.

When Shahnaz was eleven, she spent a summer in Tehran but was not allowed to stay at the palace with her father and Soraya, instead living in a house nearby. However, over time, their relationship improved and Shahnaz objected to her father's divorce from Soraya. When he came of age, the Shah attempted to arrange a political marriage between Shahnaz and King Faisal of Iraq to strengthen the relationship between the two countries, but Shahnaz refused, not wanting to be a pawn in a political alliance. On October 11, 1957, at the age of 16, Shahnaz married Ardeshir Zahedi, the son of General Fazlollah Zahedi, in a modest ceremony ordered by the Shah.

The couple welcomed a daughter named Mahnaz, but divorced in 1964, reportedly due to Shahnaz's struggles with her husband's infidelity. After the divorce, Shahnaz suffered from depression exacerbated by childhood trauma and marital problems. During this difficult period, she became involved with Khosrow Jahanbani, a young artist who introduced her to drugs, leading to her addiction. The Shah was furious when he discovered Khosrow's influence over Shahnaz and considered having him imprisoned. However, Shahnaz chose to stay with Khosrow and they married in February 1971 at the Iranian Embassy in Paris, despite the Shah's initial objections. He eventually accepted their marriage on the condition that they reside in Switzerland and Shahnaz undergo drug treatment. Their marriage lasted until Khosrow's death in 2014, and they had two children together.

In the later years of Mohammad Reza Shah's life, he divided part of his estate among his children, giving Shahnaz 8% and her daughter 2%. When she learned of the inheritance division after her father's death, Shahnaz felt slighted compared to her half-sisters and pursued legal action in France. However, the inheritance was enough for her family to live comfortably away from political turmoil. After the Iranian Revolution, Shahnaz settled in Switzerland, where she still lives today, with Swiss citizenship. She also received Egyptian citizenship in December 2013 due to her mother's royal lineage. Shahnaz's life was marked by both challenges and advantages; despite facing family conflicts and personal struggles, she eventually found stability and peace in Switzerland, away from the political upheaval that affected many of her relatives.