The Dhoni-led side was restricted to just 129/7 in the allotted twenty overs.
Virat Kohli top-scored for the Men in Blue as he played a knock of 43 runs from 34 balls with the help of four boundaries and one six.
In the final overs, Ravindra Jadeja played a cameo of 33 runs off just 25 balls to take the team's total past the 120-run mark.
For England, Ravi Bopara took three wickets.
Chasing 130, England was left at 46/4 in the eighth over as Alastair Cook (2), Jonathan Trott (20), Ian Bell (13), and Joe Root (7) were all sent back to the pavilion.
Eoin Morgan and Ravi Bopara then steadied the ship for England as the duo put on 64 runs for the fifth wicket.
However, with just 20 runs away from the target, England lost the wickets of Morgan (33) and Bopara (30) as both batsmen were sent back to the pavilion by Ishant Sharma.
After the dismissal of both batsmen, England did not manage to recover and the side ended up losing the finals by 5 runs.
With this win, MS Dhoni became the first captain in the history of cricket to win all major ICC trophies (50-over World Cup, 20-over World Cup and Champions Trophy).
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