The construction of the palace was begun in 1859 and completed in 1872. Abdul Ghani named it Ahsan Manzil after his son Nawab Khwaja Ahsanullah. The newly built palace first came to be known as the Rang Mahal. On April 7, 1888, a tornado caused severe damage to Ahsan Manzil -- Andar Mahal, the older part of the palace, was completely devastated. During the reconstruction of the Andar Mahal a good part of the palace was overhauled and repaired, and the exquisite dome of the present Rang Mahal was added. Ahsan Manzil was again damaged by an earthquake in 12 June 1897 and again repaired by the Nawab Ahsanullah.
In 1874, Lord Northbrook, Governor General of India attended an evening function in the palace when he came to lay the foundation of a water works installed by Nawab Abdul Ghani. In 1888, Lord Dufferin also accepted the hospitality offered at Ahsan Manzil. In 1904 Lord Curzon, on a visit to East Bengal, stayed in this palace on 18 and 19 February to win public support for the proposed Partition of Bengal.
Almost all political activities of Nawab Khwaja Salimullah centred round this palace. Ahsan Manzil was the cradle of the All India Muslim League. With the decline of the Nawabs of Dhaka, Ahsan Manzil also started to decline.
When in 1952 the Dhaka Nawab State was acquired under the East Bengal Estate Acquisition Act, it became impossible for the successors of the Nawabs to maintain the palace due to financial constraints. Nawab Khwaja Habibullah started living at Paribag Green House soon after the acquisition of the zamindari. The palace was soon on the verge of collapse as successors rented out rooms without considering its dignity. Over the years illegal occupants turned the place into a filthy slum.
Recognizing the historical and architectural importance of the Ahsan Manzil, the government of Bangladesh took the initiative to renovate it. In 1985 Ahsan Manzil and its surroundings were acquired. After the completion of the renovation work in 1992 under the supervision of the Directorate of Public Works and Architecture, it was brought under the control of Bangladesh National Museum (20 September 1992). A museum has been established there.