Vishnu Digambar Paluskar was born in Kurundwad, a small town falling under the Deccan division of Bombay Presidency during British rule, presently in Maharashtra. His father, Digambar Gopal Paluskar, was a singer of Kirtan, a religious song.

He went to a local school in Kurundwad for primary education. But tragedy struck Paluskar at an early age. During a Hindu festival called Datta Jayanti, a fire-cracker burst near his face damaging both his eyes. Being a small town, there was no immediate treatment available and Paluskar lost his eyesight.
The king of Miraj recognising the talent in the boy put him under the guidance of Balakrishnabuwa Ichalkaranjikar, a learned musician. Paluskar trained under him for 12 years till in 1896 the relations between the teacher and student became strained.

On May 5, 1901 Paluskar founded the Gandharva Mahavidyala, a school to impart formal training in Indian classical music. It was a school open to all and one of the first music schools in India to run on public support and donations rather than the patronage of the royalty. The school was a challenge to the traditional teacher-student method of training music where a student lived under the roof of the teacher. Many students from his early batches became respected musicians and teachers in North India. This brought a change in the way people looked at classical musicians. They started treating musicians with respect which was not associated with the profession earlier.

In September 1908 Paluskar went to Bombay (now Mumbai) to establish another branch of the school. As the work-load increased, Paluskar shifted the school from Lahore to Bombay. To accommodate all the students, he took loans and built a new building for the school and built hostels for the students. He worked very hard and gave several concerts in public places but could not gather sufficient funds to pay his debt. Finally, when he was on a concert tour in 1924, his creditors attached his properties and auctioned off the school. This was a big blow to Paluskar.