Oberon was born in Bombay (now Mumbai), British India. Until fairly recently, her parentage has remained deliberately obscure. Merle's mother was Anglo-Sri Lankan Constance Selby; her father is unknown. Constance's mother Charlotte Selby took the child immediately and raised Merle as her own, never revealing her true parentage to anyone. Charlotte's partner Arthur Thompson, a British army officer stationed in India, became Merle's putative father, and Charlotte her mother. Merle knew Constance only as her "sister."

In 1914, when Merle was three, Arthur Thompson died of pneumonia on the Western Front in the early months of World War I. Merle, with her "mother," led an impoverished existence in shabby Bombay apartments for a few years. Then, in 1917, they moved to better circumstances in Calcutta (now Kolkata). Oberon received a foundation scholarship to attend La Martiniere College for Girls, a well-known Calcutta private school. There, she was constantly taunted for her unco