In 1893, a delayed monsoon has rendered the farmers of Champaner unable to grow any crops. They pay a visit to King Puran Singh to ask for exemption from the annual tax (lagaan). The king, a nominal figure under protection of the British Raj, is at the Cantonment where a cricket match is underway between the British officers. At the game, a young farmer named Bhuvan (Aamir Khan) gets into a scuffle with one of the officers and ends up mocking the game in front of the commanding officer, Captain Andrew Russell (Paul Blackthorne). The short-tempered Captain challenges Bhuvan to a match of cricket in exchange for cancelling lagaan. He raises the stakes by offering exemption for the next three years should the farmers win, but also asking for triple-tax should the farmers lose. Bhuvan accepts the challenge.
Assembling a team proves to be difficult as the only people to support Bhuvan are his mother and Gauri, the daughter of the village medic. The next day, Bhuvan puts up a public display of cricket in the village square and gains two supporters – Bagha, a strong drummer and Guran, an eccentric astrologer. To learn the rules of the game, they start secretly going to the cantonment to observe the playing officers. Unexpected help comes in the form of Captain Russell’s sister, Elizabeth (Rachel Shelley), who wants to give the farmers a fair chance by teaching them the game. With the help of an Indian translator, she starts meeting Bhuvan and his team at a ground outside their village. Soon, other villagers join the team. With a few weeks to go, Bhuvan is still missing one player and spots a hidden talent in Bhura, a cripple living on the fringes of the village. Bhura, bowling from his injured hand, can naturally spin the ball. The other team members threaten a walkout because Bhura is also an untouchable, but Bhuvan reminds them of the stakes and expresses belief that Bhura will prove to be their team’s strongest weapon.
The day of the match arrives and the British team elects to bat. The match has taken on a new dimension for Captain Russell, because he has been commanded by his superiors to pay the exempted lagaan from his own pocket should his team lose the match. The British team lose early wickets thanks to the unconventional bowling style of the farmers; however, they end the day’s play positively with Captain Russell leading the scoring. Bhura has been completely ineffective the whole day. At night, Elizabeth spies Lakha, a member of Bhuvan’s team, talking to her brother. Lakha had been playing poorly that day and she informs Bhuvan of his betrayal. The villagers chase after Lakha to kill him but Bhuvan decides to give him another chance when Lakha confesses to being jealous of Gauri’s love for Bhuvan.
The next day, Lakha redeems himself on the field and plays spiritedly. Bhura regains his ability to spin the ball, now that the ball has lost its hardness. He takes a hat-trick and some quick wickets, and the British innings is over. The villagers’ run chase starts promisingly but ends in disaster as the main batting order, apart from Bhuvan, lose their wickets before the end of the day. Defeat is now looming large. The next day, steady batting by Bhuvan and Ismail, an injured but capable player, gets them out of trouble. With victory in sight, Ismail is run out leaving Bhuvan to make the remaining runs. With an over left to play, Bhuvan loses strike and Bhura is forced to bat for the victory. With a boundary needed on the last ball, he only manages a single. The unbiased British umpire, however, calls a no-ball (illegal delivery), putting Bhuvan on strike for the replayed delivery. He swings and clears the boundary, winning the match for his team.
In the coming weeks, the Cantonment is disbanded, and the villagers watch as the British caravan departs Champaner, seemingly forever. Elizabeth, who had fallen in love with Bhuvan, steps out to bid him a tearful farewell. She returns to England and never marries, while Gauri and Bhuvan get married with great fanfare in the village.