In 1939 Italy, Guido Orefice is a young Jewish man who is leaving his old life and going to work in the city where his uncle lives. Guido is comical and sharp, making the best from each situation he encounters. From the start he falls in love with a girl Dora. Later he sees her again in the city where she is a teacher. Dora is set to be engaged to a rich but arrogant man. He is a local government official with whom Guido has run-ins from the beginning. Guido is still in love with Dora and performs many stunts in order to see her. Guido sets up many "coincidental" incidents to show his interest. Finally Dora sees Guido's affection and promise and gives in against her better judgement. He steals her from her engagement party on a horse, humiliating her fiancé and mother. Soon they are married and have a son, Giosué.
Through the first part, the film depicts the changing political climate in Italy: Guido frequently imitates members of the National Fascist Party, skewering their racist logic and pseudoscientific reasoning (at one point, jumping onto a table to demonstrate his "perfect Aryan bellybutton"). However, the growing Fascist wave is also evident: the horse Guido steals Dora away on has been painted green and covered in antisemitic insults. Later during World War II, after Dora and her mother have reconciled, Guido, his Uncle Eliseo and Giosué are seized on Giosué's birthday. They and many other Jews are forced onto a train and taken to a concentration camp. After confronting a guard about her husband and son and being told there is no mistake, Dora volunteers to get on the train in order to be close to her family. However, as men and women are separated in the camp, Dora and Guido never see each other during the internment. Thus, Guido pulls off stunts, such as using the camp's loudspeaker, to send messages, symbolic or literal, to Dora to assure her that he and their son are safe. Eliseo is executed in a gas chamber shortly after their arrival. Giosué barely avoids being gassed himself as he hates to take baths and showers, and did not follow the other children when they had been ordered to enter the gas chambers.
In the camp, Guido hides their true situation from his son. Guido explains to Giosué that the camp is a complicated game in which he must perform the tasks Guido gives him. Giosué is at times reluctant to go along with the game, but Guido convinces him each time to continue on. Guido sets up the concentration camp as a game for Giosué. Each of the tasks will earn them points and whoever gets to one thousand points first will win a tank. He tells him that if he cries, complains that he wants his mother, or says that he is hungry, he will lose points, while quiet boys who hide from the camp guards earn extra points. Guido uses this game to explain features of the concentration camp that would otherwise be frightening for a young child: the guards are mean only because they want the tank for themselves; the dwindling numbers of children (who are being killed in gas chambers) are only hiding in order to score more points than Giosué so they can win the game. He puts off Giosué's requests to end the game and return home by convincing him that they are in the lead for the tank, and need only wait a short while before they can return home with their tank. Guido eventually buys additional time by intentionally getting Giosué mixed in with nearby German schoolchildren, and briefly working as a servant for the same kids in order to help keep the other officials from noticing that Giosué is actually Italian.
Despite being surrounded by the misery, sickness, and death at the camp, Giosué does not question this fiction because of his father's convincing performance and his own innocence. Guido maintains this story right until the end when, in the chaos of shutting down the camp as the Allied forces approach, he tells his son to stay in a sweatbox until everybody has left, this being the final competition before the tank is his. As the camp is in chaos Guido goes off to find Dora, but while he is out he is caught by a German soldier. An officer makes the decision to execute Guido. Guido is led off by the soldier to be executed. While he is walking to his death, Guido passes by Giosué one last time, still in character and playing the game. The next morning, Giosué emerges from the sweatbox, just as a U.S. Army unit led by a Sherman tank arrives and the camp is liberated. Giosué is elated and is convinced he has won the game and the prize. The captives in the concentration camp also emerge from hiding. The prisoners travel to safety, accompanied by the Americans. While they are traveling, the soldiers allow Giosué to ride on the tank with them. Giosué soon spots Dora in the procession leaving the camp. Giosué and Dora are reunited and are extremely happy to see each other. In the film, Giosué is a young boy; however, both the beginning and ending of the film are narrated by an older Giosué recalling his father's story of sacrifice for his family.