A low-cost, green and reproducible citric acid assisted synthesis of nanocrystalline $Al_{0.5}Ag_{0.5}TiO_3$ (n-AAT) powder is reported. X-ray, FTIR, energy dispersive X-ray, transmission electron microscopy and scanning electron microscopy analyses are performed to ascertain the formation of n-AAT. X-ray diffraction data analysis indicated the formation of monoclinic structure. Spherical shaped particles having the sizes of 3-15 nm are found. The mechanism of nano-transformation for the soft-chemical synthesis of n-AAT has been explained using simple organic chemistry rules and nucleation and growth theory. Dielectric study revealed that AAT ceramic might be a suitable candidate for capacitor applications.