In the small town of Champaner (in the state of Gujarat, western India) during the height of the British empire in India in 1893, Captain Andrew Russell (Paul Blackthorne), the commanding officer of the Champaner cantonment, has imposed high taxes (“Lagaan”) on people from the local villages that they are unable to pay due to a prolonged drought. Led by Bhuvan (Aamir Khan), the villagers beg Raja Puran Singh (Kulbhushan Kharbanda) to help them. He tells them that, much to his regret, he is bound by British law.
After their visit to the Raja, the villagers witness a cricket match. Bhuvan mocks the game and gets into an argument with one of the British officers. Taking an instant dislike to Bhuvan, Russell offers to cancel the taxes of the whole province “for three years” if the villagers can beat his men in a game of cricket. If the villagers lose, however, they will have to pay three times their normal taxes. Bhuvan accepts this wager on behalf of the villages in the province, without their consent. When the other villagers learn about the bet, they are furious with Bhuvan. He argues that it is important for everyone to fight against British rule.
Bhuvan begins to prepare the villagers for the match. He initially finds only five people willing to join the team. He is aided in his efforts by Russell’s sister Elizabeth (Rachel Shelley) who feels that her brother has mistreated the villagers. As she teaches them the rules of the game, she falls in love with Bhuvan, much to the anguish of Gauri (Gracy Singh) who is also in love with him. After Bhuvan reassures Gauri of his feelings for her, the woodcutter Lakha (Yashpal Sharma) becomes enraged as he is in love with Gauri.
In an attempt to discredit Bhuvan, Lakha offers himself as a spy for Russell and joins the villagers’ team to destroy it. Eventually the villagers realise that winning equals freedom. As a few of them are insulted by the British, they join the team. Short one player, Bhuvan invites an untouchable, Kachra (Aditya Lakhia), who can bowl spinners. The villagers, conditioned by long-term prejudice against Dalits, refuse to play if Kachra joins the team. Bhuvan chastises the villagers, shaming them into accepting Kachra.