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Murli Prasad Sharma, nicknamed "Munna Bhai", is a street-wise, Bombay Hindi-speaking gangster in the streets of Mumbai, who is always supported by his loyal sidekick, Sarkeshwar, nicknamed "Circuit". Once a year, Munna and Circuit's gang converts his hide-out into a fully-functioning hospital, to fool Munna's visiting parents Hari and Parvati, who believe that Munna has become a real physician. Munna and Circuit's goons take turns playing doctors, staff and patients, to keep up the charade. This works for many years, until one of Hari's annual visits with Parvati culminates in Hari bumping into Dr. Jagdish Chandra Asthana, who founded the first hospital in Munna's village years ago. Hari proposes to Asthana that they get Asthana's daughter "Chinki" and Munna married, recalling that the two were childhood friends in their village. Asthana agrees, even though Munna contacts "Chinki" and asks her to reject him, lest his parents discover the truth. However, it is when his maid reacts shockingly to Munna's photograph that Asthana realizes the truth, and exposes Munna's real occupation to Hari and Parvati. Humiliated and embarrassed at their son's lack of a real vocation, Hari and Parvati leave the city and return home to their village. Munna, in grief and despair, decides that the only way to redeem himself and take revenge against the spiteful Asthana is to become a physician in reality. With the help of Circuit and others, Munna "gains admission" to a medical college in order to obtain a MBBS degree by using Dr. Rustom Pavri, a faculty member of "Imperial Institute of Medical Studies" as a prop to write the pre-medical examinations. He again encounters Asthana in the same college, who happens to be the dean. His success there becomes dependent upon the (coerced) help of Rustom, which includes situations such as cheating in the sessionals. Although he has no medical skills, Munna transforms those around him with the "Jadoo Ki Jhappi" ("Magical Hug") – a method of comfort taught to Munna by his mother – and the compassion he shows towards those in need. Despite the school's emphasis on mechanical, cartesian, impersonal and often bureaucratic relationships between doctors and patients, Munna constantly seeks to impose a more empathetic and almost holistic regimen around himself. He enforces the regime of "common-sense treatment" and uses old-fashioned kindness and love to "cure" many patients at the hospital, including Karan, a suicidal youngster he met on his first day of college. Attempting to treat a brain-dead patient, Anand Banerjee in his own empathetic and compassionate style, he defies all convention by interacting on familiar but autocratic terms with patients, humiliating school bullies, effusively thanking a hitherto underappreciated janitor, and encouraging the patients themselves to make changes in their lives, so that they do not need drugs or surgery. Asthana, who perceives all this as symptoms of chaos, is unable to prevent it from expanding and gaining ground at his college. He begins laughing in a way that implies that he has gone insanely mad, as an attempt to practice "laughter therapy", which serves more to convey his anger than diffuse it. In the meantime, the carefree Munna also develops a friendly relationship with Dr. Suman, another faculty member at the hospital, who turns out to be Asthana's daughter. Unaware that Suman and his childhood friend "Chinki" are one and the same, an ignorance that Suman hilariously exploits to a point where he is bluffed into believing "Chinki" is not his type anymore, Munna decides to confess his feelings for Suman and abandon his personal vendetta against "Chinki" and Asthana. Meanwhile, Munna proceeds to arrange Circuit to bring a stripper inside the patient ward in an attempt to cheer up Zaheer Ali, a man dying from stomach cancer, whom Munna befriends in the process. At the same time, Munna cures Rustom's dying father by his own methods as well, which earns him Rustom's respect and leads Zaheer to consider Munna an almost "divine" man. Asthana tries several times to expel Munna but is often thwarted by Munna's wit or the affection with which the others at the college, including, to some extent, Suman herself, regard Munna, having gained superior self-esteem by his methods. When Asthana learns about the stripper episode, he sees this as a potential reason to expel Munna on disciplinary grounds, but is unable to do so after Munna deliberately injures himself gravely in order to stay back. However, when he does recover, the hospital staff, patients and students stand in Asthana's way and refuse to let Munna leave. Thus, Asthana challenges Munna to take a test in front of him and the entire college the next day to keep his enrolment. Everyone accepts the challenge. Later that night, during the preparation, Zaheer collapses to a worsening health and calls for Munna, asking him to save his life, but unfortunately, he dies in Munna's arms. The next morning, Munna begins answering the questions well, but Asthana intervenes and announces he will ask all the forthcoming questions, shocking everyone. Munna is eventually unable to answer and is ashamed of himself into leaving the college. He confesses the truth to everyone and breaks down about his guilt to Zaheer, his parents, and everyone he cared for. Everyone except Asthana is moved to tears by his speech. In the moments immediately following Munna's departure, Anand miraculously awakens from his vegetative state. Suman, at this point, realizes Munna as the miracle behind Anand's recovery and gives a heartfelt speech, criticising her father for having banished Munna, pointing out that doing so is as good as banishing hope, compassion, love, and happiness from the college. Asthana eventually realises his folly. Although Munna ends up unsuccessful in becoming a physician, the news of his "miraculous" treatments reaches Hari and Parvati and they return from their village. Later that night, Munna reconciles with Hari and Parvati and is asked by them to meet "Chinki". When he goes to meet "Chinki" atop the terrace, Munna is amused to find out that "Chinki" is in fact Suman herself. Following their marriage, Munna and Suman open a hospital in Munna's home village, where they implement Munna's ideas daily, while Asthana is revealed to have picked up Munna's lingo there as the head doctor, while also implementing the fun-oriented methods used by Munna earlier. The medical college – under Rustom's management since Asthana's retirement – also begins to imitate Munna's radical methods of treatment. Thus, in addition to the birth of their offsprings, earns Munna the nickname "Munna Bhai – M.B.B.S. – Miya Biwi Bachhon Samet" (literally "Husband Wife With Children"), even though he does not become a physician in real. His sidekick Circuit also gets married a year later and has a son, who is nicknamed "Short Circuit". As the film concludes, Anand, restored to normal mental health, narrates the story to a few children at the hospital as he is about to leave for Kolkata.