Derivation of Hepatocytes from stem cells have been established through various protocols including growth factors (GF) and small molecules (SM) among others. However, mesenchymal stem cell-based derivation of hepatocytes still remains expensive due to the use of cocktail of growth factors and also requires long duration for differentiation, thus limiting its potential clinical applications. In this study, we have developed a chemically defined differentiation strategy that is exclusively based on SM and takes 14 days as compared to 23-28 days for GF-based protocol. We optimized a stage specific differentiation protocol for differentiation of rat bone marrow derived mesenchymal stem cells (MSC) to functional hepatocytes like cells (dHep), that followed four stages i.e., definitive endoderm (DE), hepatic competence (HC), hepatic specification (HS) and hepatic differentiation and growth. We further developed hepatic tissue using human decellularized liver extracellular matrix and compared it with the growth factor-based protocol derived hepatic tissue at transcriptional level. dHep, upon transplantation in rat model of acute liver injury (ALI), was capable of ameliorating liver injury in rats and improved liver function and tissue damage compared to ALI model. In summary, this is the first study of deriving hepatocytes and hepatic tissue from MSC utilizing a stage specific strategy by exclusively using small molecules as differentiation factors.