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She attended St. Anthony Girls' High School, located in Chembur, and later attended Podar College. She was the captain of the baseball team and earned a black belt in Karate.Shetty currently lives in Mumbai with her parents and sister. Her younger sister Shamita Shetty is a budding Bollywood actress and they worked together in the film Fareb (2005).

Shetty started her career by modelling for the soft drinks company Limca in 1991 at the age of 16.

Her appearances in the adverts of Limca caught the attention of agents of the Bollywood film industry and she made her film debut in 1993 at the age of 17 in Baazigar, portraying a woman murdered by her psychopathic boyfriend. Although she was a supporting actress alongside Shah Rukh Khan and Kajol, the film was a major success and earned her a nomination for the Filmfare Best Supporting Actress Award.

Her first leading role was in the film Aag in 1994, which was averagely received at the box office. She had a hit that same year with the film Main Khiladi Tu Anari opposite Akshay Kumar. This was followed by many films which were average to poor performers at the box office. Shetty starred another big film that year Aao Pyar Karen followed by Hathkadi in 1995 where she was working alongside actors such as Saif Ali Khan, Govinda and Madhoo but they failed at the box office.

1997 was one of her busiest years yet, she appeared in six different films, beginning with the small Telugu language film Veedeva Dani Babu. Her first major Bollywood film of that year was the action thriller Auzaar. Shilpa portrayed the character of Prathna Thakur alongside actors Salman Khan and Sanjay Kapoor.

In 2000 Shetty received much acclaim for her role in Dhadkan which earned reasonable takings an the Indian box office. She received her first nomination under the Best Actress category at the Filmfare Awards although she lost to Karisma Kapoor. She would later go on to star with Kapoor in the film Rishtey (2002). Her performance as an eccentric fisherwoman was appreciated and she received a nomination under the Filmfare Best Supporting Actress Award category.

2004 was a good year for the actress. She received much acclaim for her performance as an AIDS victim in Phir Milenge. This was followed by the action thriller Dus which was an average success. She also starred with her sister in the film Fareb in 2005. Shilpa had one release in 2006, the much delayed Shaadi Karke Phas Gaya Yaar. The film was a box office flop but she got good reviews for her role as a wife with negative shades.