Synthesis of hybrid core-shell nanostructures requires moderate lattice mismatch (<5%) between the materials of the core and the shell and usually results in the formation of structures with an atomically larger entity comprising the core. A reverse situation, where an atomically larger entity encapsulates a smaller atomic radius component having substantial lattice mismatch is unachievable by conventional growth techniques. Here, we report successful synthesis of ultra-small, light-emitting Si quantum dots (QDs) encapsulated by Au nanoparticles (NPs) forming a hybrid nanocomposite that exhibits intense room temperature photoluminescence (PL) and intriguing plasmon-exciton coupling. A facile strategy was adopted to utilize the active surface of oxide etched Si QDs as preferential sites for Au NP nucleation and growth which resulted in the formation of core-shell nanostructures consisting of an atomically smaller Si QD core surrounded by a substantially lattice-mismatched Au NP shell. The PL characteristics of the luminescent Si QDs (quantum yield ∼28%) are dramatically altered following Au NP encapsulation. Au coverage of the bare Si QDs effectively stabilizes the emission spectrum and leads to a red-shift of the PL maxima by ∼37 nm. The oxide related PL peaks observed in Si QDs are absent in the Au treated sample suggesting the disappearance of oxide states and the appearance of Au NP associated Stark shifted interface states within the widened band-gap of the Si QDs. Emission kinetics of the hybrid system show accelerated decay due to non-radiative energy transfer between the Si QDs and the Au NPs and associated quenching in PL efficiency. Nevertheless, the quantum yield of the hybrid remains high (∼20%) which renders these hetero-nanostructures exciting candidates for multifarious applications.