Guru Arjan was born in Goindval to Bibi Bhani and Jetha Sodhi. Bibi Bhani was the daughter of Guru Amar Das, and her husband Jetha Sodhi later came to be known as Guru Ram Das. Guru Arjan's birthplace site is now memorialized as the Gurdwara Chaubara Sahib. He had two brothers: Prithi Chand and Mahadev. Various Sikh chroniclers give his birth year as 1553 or 1563, the latter is accepted by scholarly consensus as the actual year of birth with 15 April as the accepted birth date. Guru Arjan spent the first 11 years of his life in Goindwal and the next seven years with his father in Ramdaspur. Per Sikh tradition, he had stayed for two years in Lahore during his youth after being sent by his father to attend the wedding of his first cousin Sahari Mal's son as well as to establish a Sikh congregation. He was appointed as the Sikh Guru in 1581 after the death of his father. Guru Ram Das was a Khatri of the Sodhi sub-caste. With Guru Arjan's succession, the Guruship remained in the Sodhi family of Guru Ram Das.

Guru Ram Das chose Arjan, the youngest, to succeed him as the fifth Sikh Guru. Mahadev, the middle brother chose the life of an ascetic. His choice of Arjan as successor, as throughout most of the history of Sikh Guru successions, led to disputes and internal divisions among the Sikhs. The succession dispute regarding Guru Arjan created a schism that yielded different narratives for the two factions. In the orthodox Sikh tradition, Prithi Chand is remembered as vehemently opposing Guru Arjan, creating a factional sect of the Sikh community. The Sikhs following Guru Arjan referred to the breakaway faction as Minas (literally, "scoundrels"), who are alleged to have attempted to assassinate young Hargobind, and befriended Mughal agents. Subsequent written competing texts written by the Minas, on the other hand, offered a different explanation for the attempt on Hargobind's life, and present him as devoted to his younger brother Guru Arjan. The eldest son of Prithi Chand, Miharvan, is mentioned in both traditions as having received tutelage from both Prithi Chand and Guru Arjan as a child.

The competing texts acknowledge the disagreements. They state Prithi Chand left Amritsar, became the Sahib Guru after the martyrdom of Guru Arjan and one who disputed the succession of Guru Hargobind as the next Guru. The followers of Prithi Chand considered themselves the true followers of Guru Nanak as they rejected the increasing emphasis on militarization of the panth under Guru Hargobind to resist Mughal persecution in the wake of Guru Arjan's martyrdom, in favor of non-violent interiorization. In addition to Prithi Chand, a son of Guru Amar Das named Baba Mohan had also challenged the authority of Guru Arjan. These challenging claims were asserted by the early Sikh sects in part by their manuscripts of Sikh hymns. Baba Mohan possessed the Goindval pothi containing the hymns of Nanak and other early Gurus, while Prithi Chand possessed the Guru Harsahai pothi then believed to have been the oldest scripture from the time of Guru Nanak.This, state scholars, may have triggered Guru Arjan to create a much enlarged, official version of the Adi Granth. The mainstream Sikh tradition recognised Guru Arjan as the fifth Guru, and Hargobind as the sixth Guru. Arjan, at age 18, became the fifth Guru in 1581 inheriting the title from his father. After his execution by the Muslim officials of the Mughal Empire, his son Hargobind became the sixth Guru in 1606 CE.

Guru Arjan's father Guru Ram Das founded the town named after him "Ramdaspur", around a large man-made water pool called "Ramdas Sarovar". Guru Arjan continued the infrastructure-building effort of his father. The town expanded during the time of Guru Arjan, financed by donations and constructed by voluntary work. The pool area grew into a temple complex with the gurdwara Harmandir Sahib near the pool. Guru Arjan installed the scripture of Sikhism inside the new temple in 1604. The city that emerged is now known as Amritsar, and is the holiest pilgrimage site in Sikhism. Continuing the efforts of Guru Ram Das, Guru Arjan established Amritsar as a primary Sikh pilgrimage destination. He wrote a voluminous amount of Sikh scripture including the popular Sukhmani Sahib. Guru Arjan is credited with completing many other infrastructure projects, such as water reservoirs called Santokhsar (lake of peace) and Gongsar (lake of Gongaga), founding the towns of Tarn Taran, Kartarpur and Hargobindpur.

According to the Sikh tradition, Guru Arjan compiled the Adi Granth by collecting hymns of past Gurus from many places, then rejecting those that he considered as fakes or to be diverging from the teachings of the Gurus. His approved collection included hymns from the first four Gurus of Sikhism, those he composed, as well as 17 Hindu bards and 2 Muslim bards. The compilation was completed on August 30, 1604, according to the Sikh tradition and installed in the Harmandir Sahib temple on September 1, 1604. Guru Arjan was a prolific poet who composed 2,218 hymns. More than half of the volume of Guru Granth Sahib and the largest collection of hymns has been composed by Guru Arjan. According to Christopher Shackle and Arvind-Pal Singh Mandair, Guru Arjan's compositions combined spiritual message in an "encyclopedic linguistic sophistication" with "Braj Bhasha forms and learned Sanskrit vocabulary". After Guru Arjan completed and installed the Adi Granth in the Harimandir Sahib, Emperor Akbar was informed of the development with the allegation that it contained teachings hostile to Islam. He ordered a copy be brought to him. Guru Arjan sent him a copy on a thali (plate), with the following message that was later added to the expanded text:

In the year 1606, the fifth Sikh guru, Guru Arjan Dev, was captured by Mughal Emperor Jahangir and imprisoned in Lahore Fort. Part of the reason was the fact that he had blessed Jahangir