In the direction of an under researched area of teachers' knowledge of Artificial intelligence (AI) and its impact on their readiness to integrates AI in Education (AIEd), this study aim to critically examine the nuanced relationship between AI literacy of teachers (a prominent determinant of teachers knowledge of AI), and their readiness. AI literacy of teachers was analysed through its four dimensions, foundational understanding, application and integration, critical evaluation, and ethical awareness, focusing on K-12 teachers in Indian public schools to develop context specific study on teachers readiness. An interview guide was developed using the AI literacy framework for educators, to conduct qualitative research method, guided by semi structured interviews with five K-12 teachers in India. And, the key findings from the study indicate that K-12 teachers in India possess varying, yet foundational, levels of AI literacy, with an emerging conceptual understanding of AI and its functionality but there was often limited practical experience in applying AI tools. Teachers also demonstrated a capacity for critical evaluation regarding pedagogical and contextual implications, as well as an emerging ethical discernment of AI in education. However, the lack of practical skills in applying AI is resulting from challenges teachers face in public schools in terms of insufficient digital infrastructure, no access to resource, and lack of institutional support. The study findings also revealed a significant disconnect between national policies, and their practical implementation on the ground, concerning comprehensive and practical teacher training to integrated AIEd. Contextual factors emerged as pivotal impediments to AI integration, shaping teachers' AI literacy and overall readiness revealing that teacher readiness is not solely an individual responsibility but a collective challenge requiring substantial investment and support from educational institutions and policymakers. The study recommends substantial investment in digital infrastructure to overcome the digital divide by strengthening systemic and institutional support and advocates for extensive hands- on professional development for teachers. Furthermore, it calls for the co-creation of institutional policies by collaborating with K-12 teachers and establishing ongoing support systems for successful and relevant implementation.