Lü Shuxiang was born in Danyang, Jiangsu Province. He studied Foreign Languages and Literature in the National Central University and graduated in 1926. He then taught in Danyang Middle School and Suzhou High School. In 1936, he went to England for postgraduate studies in the Anthropology Department of Oxford University and then in the Library Science Department of the University of London. He returned to China in 1938 during the war, and held various professorships in Yunnan University, Huaxi Union College and Jinling College, and later, the National Central University.
After the establishment of the People's Republic of China, Lü was a professor in the Chinese Department of Tsinghua University from 1950 to 1952. Starting from 1952, he worked in the Institute of Languages in the Chinese Academy of Sciences. He was a committee member and vice director of the important China Language Reform Commission. From 1978 to 1985, he was the chief editor of the journal Chinese philology. From 1980 to 1985, he was the president of the Association of Chinese Linguistics. He was editor-in-chief of the authoritative Dictionary of Modern Chinese, and served on the editorial board for the Encyclopaedia Sinica. In 1987, he was awarded honorary Doctor of Literature by the Chinese University of Hong Kong. He was an associate fellow in the Russian Academy of Sciences in 1997.
The artist and art educator Lü Fengzi (1886–1959), and the prominent Buddhist scholar Lü Cheng (1896–1989), were his cousins.