Withania somnifera or Ashwagandha is a medicinal herb of Ayurveda. Though the extract and purified molecules, withanolides, from this plant have been shown to have different pharmacological activities, their effect on bone formation has not been studied. Here, we show that one of the withanolide, withaferin A (WFA) acts as a proteasomal inhibitor (PI) and binds to specific catalytic β subunit of the 20S proteasome. It exerts positive effect on osteoblast by increasing osteoblast proliferation and differentiation. WFA increased expression of osteoblast-specific transcription factor and mineralizing genes, promoted osteoblast survival and suppressed inflammatory cytokines. In osteoclast, WFA treatment decreased osteoclast number directly by decreasing expression of tartarate-resistant acid phosphatase and receptor activator of nuclear factor kappa-B (RANK) and indirectly by decreasing osteoprotegrin/RANK ligand ratio. Our data show that in vitro treatment of WFA to calvarial osteoblast cells decreased expression of E3 ubiquitin ligase, Smad ubiquitin regulatory factor 2 (Smurf2), preventing degradation of Runt-related transcription factor 2 (RunX2) and relevant Smad proteins, which are phosphorylated by bone morphogenetic protein 2. Increased Smurf2 expression due to exogenous treatment of tumor necrosis factor α (TNFα) to primary osteoblast cells was decreased by WFA treatment. This was corroborated by using small interfering RNA against Smurf2. Further, WFA also blocked nuclear factor kappa-B (NF-kB) signaling as assessed by tumor necrosis factor stimulated nuclear translocation of p65-subunit of NF-kB. Overall data show that in vitro proteasome inhibition by WFA simultaneously promoted osteoblastogenesis by stabilizing RunX2 and suppressed osteoclast differentiation, by inhibiting osteoclastogenesis. Oral administration of WFA to osteopenic ovariectomized mice increased osteoprogenitor cells in the bone marrow and increased expression of osteogenic genes. WFA supplementation improved trabecular micro-architecture of the long bones, increased biomechanical strength parameters of the vertebra and femur, decreased bone turnover markers (osteocalcin and TNFα) and expression of skeletal osteoclastogenic genes. It also increased new bone formation and expression of osteogenic genes in the femur bone as compared with vehicle groups (Sham) and ovariectomy (OVx), Bortezomib (known PI), injectible parathyroid hormone and alendronate (FDA approved drugs). WFA promoted the process of cortical bone regeneration at drill-holes site in the femur mid-diaphysis region and cortical gap was bridged with woven bone within 11 days of both estrogen sufficient and deficient (ovariectomized, Ovx) mice. Together our data suggest that WFA stimulates bone formation by abrogating proteasomal machinery and provides knowledge base for its clinical evaluation as a bone anabolic agent.