Karnaaj Rally is a handheld racing game played from a top-down perspective, mixing 2D and 3D graphics. It's an arcade racer similar to Micro Machines where the player competes against three other racers on various tracks. The player has a temporary turbo that can be refilled by driving over special items found on the race tracks. Weapons such as rockets and mines are also available, allowing the player to stop competitors from winning.
The game's career mode allows the player to compete and progress in four different race series, each with unique vehicles and courses. As players win races, they earn money that can be used to upgrade their car's tires and engine, buy more armor, rockets, and mines, or try their luck at gambling by guessing the outcome of future races.
The game features a multiplayer mode for up to four players, adding to its replay value and social aspect.