Khachanov became the third different first-time winner of a Masters tournament this season -- joining Juan Martin del Potro and John Isner -- and will rise to a career-high ranking of 11th on Monday.
He denied Djokovic a fourth title in a row ahead of his return to world number one, and avenged a straight-sets loss to the Serb at Wimbledon in July.
"It's one of my biggest titles so far, biggest achievement. And in general, it's a breakthrough season," said Khachanov, who also won the Kremlin Cup in Moscow last month.
"And this title, it's a good year-end. And maybe I'm not crying, but still I'm really happy."
"To finish the season like this is really a dream come true," he added.
Going into the event, Khachanov had won just three of 19 encounters against players in the top 10 but claimed a fourth such scalp in a week after snapping Djokovic's 22-match winning run.
He could yet take part at the ATP Tour Finals in London after earning a spot as the second alternate for the season-ending event.
"I'm happy with the way I'm playing. I mean, match by match I was increasing my level," said the 22-year-old Khachanov.
"I think that's what I showed against all the top 10 guys. I mean, today was Novak, the one who is No. 1 in the world. That's the first thing.
"The second thing is after some tough loses against top guys like Rafa in New York, I think they push me to the limit and even to work more harder.
"And I saw that my level is there. I could play and compete on this level. So it was a matter of just a few points."
Djokovic, who will reclaim the top ranking from Rafael Nadal for the first time in two years, made a strong start in his pursuit of a record-equalling 33rd Masters title as he broke for a 3-1 lead in the opening set.
- Ruthless Khachanov -
But world number 18 Khachanov, unbeaten in three previous finals, hit back in the very next game as Djokovic dragged a forehand into the tramlines, down break point.
The unseeded Russian then broke Djokovic for a 6-5 lead, momentarily faltering as he tried to serve out for the set before calmly regrouping to surge ahead.
Djokovic overcame Roger Federer in an energy-sapping classic that lasted over three hours in Saturday's semi-finals, and the Serb began to look weary as he dropped serve to a fall behind early in the second set.
The 1.98m Khachanov secured a break for 2-1 with a crunching backhand pass down the line that Djokovic could only net on the half-volley.
The 14-time Grand Slam champion showed trademark resilience to fend off three break points while trailing 4-2, but Khachanov displayed steely composure to seal a memorable victory after an hour and 38 minutes.
"Karen played really well and he deserved to win that match," said Djokovic, who admitted he had struggled to fully recover after his gruelling showdown with Federer less than 24 hours earlier.
"I don't want to talk about that. I want to talk about how well he (Khachanov) played all week.
"All the credit to him. He deserves it. He's a young player up and coming. But already established player, top player. And he showed great quality today and he showed why we're going to see a lot of him in the future."
Khachanov is the first Russian to win a Masters title since Nikolay Davydenko in 2009.