In 1506 C.E. Chief Bahauddin a Sufi Gondal Jat established a settlement namely Pindi Bahauddin in the north-eastern corner of the region known as "Gondal Bar", after his immigration from Pindi Shah Jahanian to this area. The settlement soon became a center of intense commercial activity, hence named afterwards by the merchants as "Mandi Bahauddin", the Market of Bahauddin. The Urdu word "Mandi" implies "marketplace". The proto-city was later on fortified with 9 main doorways to guard against foreign invasions. The wall intact today was completed in 1946.
However, the recorded history of Mandi Bahauddin goes back to the era before Common Era, connecting the region with the historic figure of Alexander the Great. Some 8 km northwest of the modern-day Mandi Bahauddin town, village Mong on the southern bank of Jhelum River (Greek Hydaspes), the battle Battle of the Hydaspes River was fought between Raja Porus (Sanskrit Paurava) and Alexander. This historic battle of Hydaspes River, which Indian sources refer to as the "Battle of Jhelum", took place in 326 BCE. The kingdom of Raja Porus was situated in the northern Punjab of modern Pakistan. This battle proved the last major fight of Alexander's career, for the Macedonians, after being put up a fierce resistance by Porus' soldiery and having heard of a massive 4,000 elephant force mustered by eastern kingdoms, refused to march further east i.e. Ganges Plains.