In 1935, American archeologist Indiana Jones survives a murder attempt from Shanghai crime boss Lao Che, who hired him to retrieve the remains of Nurhaci. Indy flees from the city in the company of the young orphan Short Round and nightclub singer Willie Scott, unaware that the plane he is traveling on is owned by Che. The plane's pilots dump the fuel and parachute away, but Indy, Willie and Short Round escape using an inflatable raft before the plane crashes. The trio ride down the slopes of the Himalayas and fall into a river before arriving at the Indian village of Mayapore. There, the villagers plead for Indy's aid in retrieving a sacred lingam stone stolen along with the village's children by evil forces from the nearby Pankot Palace. Indy agrees to do so, hypothesizing that the stone is one of the five Sankara stones given by the Hindu gods to help humanity fight evil. Traveling to the palace, the trio are warmly welcomed and allowed to stay for the night as guests, attending a banquet hosted by the palace's young maharaja.
During the night, Indy is attacked by an assassin, but manages to kill him. He discovers a series of tunnels underneath the palace and explores them with Willie and Short Round. The trio eventually reaches a massive temple where they discover Thuggee cultists conducting a human sacrifice. The cult, which possesses three Sankara stones, is revealed to have abducted the children of Mayapore, using them to find the remaining stones. During an attempt to retrieve the stones, Indy is captured alongside Willie and Short Round. Thuggee high priest Mola Ram forces Indy to drink a potion that places him into a trance-like state which makes him prepare Willie for sacrifice. Short Round is put to work in the tunnels, but he escapes and interrupts the sacrifice by freeing Indy from his trance, who rescues Willie in turn.
The trio defeat the Thuggee, collect the Sankara stones and free the children, escaping an attempt by Mola Ram to drown them. As they cross a rope bridge above a river, Mola Ram ambushes them again, leading Indy to cut the bridge in two, causing a number of cultists to fall into the crocodile-infested water below. As Indy, Willie, Short Round, and Mola Ram struggle to climb up the broken bridge, Indy invokes the name of Shiva, causing the stones to burn through his satchel; one stone burns Mola Ram and he falls to the river, where he is devoured by the crocodiles. British Indian Army soldiers arrive and defeat the remaining cultists, and Indy, Willie and Short Round return to Mayapore and hand over their last remaining stone. As the villagers are reunited with their children, Indy and Willie embrace.
