Understanding the evolutionary and genomic mechanisms responsible for turning the soil-derived saprophytic mycobacteria into lethal intracellular pathogens is a critical step towards the development of strategies for the control of mycobacterial diseases. In this context, Mycobacterium indicus pranii (MIP) is of specific interest because of its unique immunological and evolutionary significance. Evolutionarily, it is the progenitor of opportunistic pathogens belonging to M. avium complex and is endowed with features that place it between saprophytic and pathogenic species. Herein, we have sequenced the complete MIP genome to understand its unique life style, basis of immunomodulation and habitat diversification in mycobacteria. As a case of massive gene acquisitions, 50.5% of MIP open reading frames (ORFs) are laterally acquired. We show, for the first time for Mycobacterium, that MIP genome has mosaic architecture. These gene acquisitions have led to the enrichment of selected gene families critical to MIP physiology. Comparative genomic analysis indicates a higher antigenic potential of MIP imparting it a unique ability for immunomodulation. Besides, it also suggests an important role of genomic fluidity in habitat diversification within mycobacteria and provides a unique view of evolutionary divergence and putative bottlenecks that might have eventually led to intracellular survival and pathogenic attributes in mycobacteria. © 2012 The Author(s).