The Kerala boys, playing in their maiden semifinal, were trailing by one goal in just the sixth minute when Prikanta directed the ball into the net.
MSP struck back through Salman K in the 19th minute to restore parity and then kept things tight to take the match to the penalty shootout.
The pressure of the tie-breaker and the vociferous crowd support for the Kerala school apparently affected the boys from Manipur as P Rabindro and skipper Sunder missed the first two shots and handed the match to the opposition.
MSP Higher Secondary School thus became the first school from Kerala to qualify for the final of the Subroto Cup.
The semifinal saw huge crowd at Ambedkar Stadium, most of them cheering and supporting the Kerala boys.
In the remaining two quarterfinals, Air Force School, Subroto Park will take on Sports Hostel Tamil Nadu while FC Dynamo Kyiv will face Steqlal High School, Afghanistan on Friday. The winners of these matches will face off in the second semifinal on Saturday.
Meanwhile, Sports Minsiter Ajay Maken and the Ministry of Sports and Youth Affairs have come forward with their support and for the first time two league matches were played at the Jawaharlal Nehru Stadium.