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Khanna is a Punjabi word, which means one quarter (1/4 or 0.25). The city was named thus because it used to be very small, just a quarter of what a normal city should be.
Khanna is an ancient town which came into existence 500 years back. History reveals that Sher Shah Suri built a number of sarais (inns) at every 12 to 15 miles along the Delhi-Lahore road. One of the sarais was built in this area which is still known as the Purani Sarai. After the decline of Mughal rule in the Punjab, Banda Bahadur captured the area from Sirhind to Hoshiarpur. After that a Jathedar of Dahedu controlled and occupied the whole of the area from Dahedu to Nabha.
Source : Wikipedia