Nearly half of the mental health disorders have their origin during the period of childhood and adolescence. Children with severe mental illness experience significant impairments in psychosocial functioning. These children have difficulty reintegrating into society and have high chances of developing poor self-care, school refusal/dropout, declining social activities, and poor educational/employment outcomes. However, no studies have explored the socio-environmental factors influencing the psychosocial functioning of children with SMIs. Therefore, this study aimed to investigate the subjective experience of parents and mental health professionals by understanding their views about the disability and the reasons they ascribe to the functional impairments among children with severe mental illness. Using a thematic analysis approach, we used a qualitative in-depth interview method to understand experiences from Indian context about the socio-environmental factors. A total of 20 in-depth interviews were conducted with parents (n = 10) and mental health professionals (n = 10). Consecutive sampling was used to recruit parents, and mental health professionals were included using purposive sampling. Participants were recruited from a tertiary care centre in Bengaluru. The analysis identified three meta-themes from parents and five meta-themes from mental health professionals interviews. Some of the factors reported by the participants affecting the functioning of children severe mental illnesses were poor response from institutions, negative community attitudes, inadequate social security, lack of mental health services, poor opportunities in the community and school, lack of child mental health policies, etc. Sound mental health and community interventions are needed to minimize the burden of disability among children, who are the future resources of any nation.