Ranjitsing Chungde was nabbed last night from near the local railway station when he was trying to flee, they said.
Khatri was found murdered in Somthana Shivan area on November 3. In the past, he had been associated with political parties like Shiv Sena and MNS.
Chungde and Khatri were once friends, but they fell out over money matters, police said, adding this may have led to the latter's murder.
Superintendent of Police Chandrakishore Mina and Additional SP interrogated Chungde, who admitted his involvement in the crime, police added.