It caters to domestic water supplies in Rawalpindi and Islamabad, and irrigation water to many of the agricultural and industrial areas surrounding the cities.
The dam was completed in 1983 after a 15-year construction period believed to have cost Rs. 1,352 million. It is 167 feet (51 m) high and stores 110,000 acre feet (140,000,000 m3) of water.
The adjoining Khanpur Lake is the venue for Sarhad Tourism Corporation's annual airborne and waterborne sports gala. The event, termed as the 'biggest' in Pakistan was scheduled to take place between 9 and 11 April 2010.
The dam was built by Ayub Khan, former President of Pakistan. The dam was believed by many to be a way for Khan to settle political scores with the feudal chief of Gakhars Raja Erij Zaman Khan.
The fore fathers of local Gakhars Rajas were given much of the local land by the British during the nineteenth century. The British rewarded the Gakhhars for their cooperation in defeating the Sikhs, but deprived the local Awan and other farmers of their land. When the decision to build Khanpur Dam was made, the Rajas wanted to receive compensation for all the land, thus depriving all the local inhabitants of their land rights. The residents desperately wanted to receive compensation or new land in the nearby New Khanpur.
The local community, led by Abdul Bashir Khan (the father of Saeed Khan), the young secretary of Khanpur's WAPDA Union in the early 1970s, took on the Ghakhars and their friends in the Khyber Pakhtunkhwa parliament. Amid threats and intimidation, the campaign succeeded in uniting most local villagers, who had nothing but their land. Abdul Bashir and his fellow activists decided to take their campaign straight to then Khyber Pakhtunkhwa governor Hayat Sherpao by camping outside the governor's house for days. Abdul Bashir and his fellow activists left Peshawar only after they had succeeded in winning the land rights for the people of Khanpur.
The locals were promised free water and electricity by WAPDA and the then provincial and federal governments, but are still waiting to this day.