Lead-free K0.5Bi0.5TiO3 (KBT) ceramics with high density (~5.36 g/cm3, 90% of X-ray density) and compositional purity (up to 90%) were synthesized using a solid-state reaction method. Strongly condensed KBT ceramics revealed homogenous local microstructures. TG/DSC (Thermogravimetry-differential scanning calorimetry) techniques characterized the thermal and structural stability of KBT. High mass stability (>0.4%) has proven no KBT thermal decomposition or other phase precipitation up to 1000 °C except for the co-existing K2Ti6O13 impurity. A strong influence of crystallites size and sintering conditions on improved dielectric and non-linear optical properties was reported. A significant increase (more than twice) in dielectric permittivity (εR), substantial for potential applications, was found in the KBT-24h specimen with extensive milling time. Moreover, it was observed that the second harmonic generation (λSHG = 532 nm) was activated at remarkably low fundamental beam intensity. Finally, spectroscopic experiments (Fourier transform Raman and far-infrared spectroscopy (FT-IR)) were supported by DFT (Density functional theory) calculations with a 2 × 2 × 2 supercell (P42mc symmetry and C4v point group). Moreover, the energy band gap was calculated (Eg = 2.46 eV), and a strong hybridization of the O-2p and Ti-3d orbitals at Eg explained the nature of band-gap transition (Γ → Γ).