In the early 18th century, the court of Maratha king Chhatrapati Shahu needs a new Peshwa, the equivalent of a modern-day prime minister. In spite of Shripad Rao's self-nomination as the Peshwa, Ambaji Pant nominates a young Bajirao. To test his spiritual wisdom and knowledge of weaponry, Shripad challenges Bajirao to split a peacock feather with an arrow. Bajirao succeeds and is given the title of Peshwa. Ten years later, his wife Kashibai is visited by her widowed friend Bhanu, whose husband was accused of spying and was ordered to be executed by Bajirao. She predicts that just as she longs for her husband, Kashibai will yearn for Bajirao.

While traveling to Sironja, an emissary from Bundelkhand enters Bajirao's tent and demands his help to fight invaders. She reveals herself to be Mastani, the daughter of the Hindu Rajput king Chhatrasal and his Persian Muslim consort Ruhani Bai. Impressed by her skills as a warrior, Bajirao assists her with his army and defeats the invaders. Chhatrasal is overjoyed and insists Bajirao spend Holi with them in Bundelkhand. Mastani and Bajirao fall in love with each other and he gives her his dagger, unaware it is a symbol of marriage among the Bundelkhand Rajputs. Bajirao departs for Pune, where Kashibai greets him with a tour of their newly-built Shaniwar Wada and shows him the Aaina Mahal (hall of mirrors), which allows her to see him from her room.

Determined to pursue her love, Mastani arrives in Pune but is treated harshly by Bajirao's mother Radhabai and accommodated in the palace for courtesans. Mastani tolerates this insult and appears to dance before Bajirao. Radhabai scornfully offers her the occupation of a royal dancer but refuses to accept her as a daughter-in-law. Mastani travels to the Chhatrapati Shahu and expresses her desire to be with Bajirao, then leaves to wait for him at a ruin across a river. During a storm, Bajirao crosses the river and chides Mastani's persistence, reminding her he is already married and that his court will never respect her if she is in a relationship with him. She agrees, despite his warning, and he declares Mastani his second wife.

The Marathas prepare to attack Delhi, the capital of the Mughal Empire, but must first ensure the Nizam of Hyderabad, the Muslim ruler of Hyderabad State, will not attack them during their assault. Bajirao leaves to confront the Nizam, Qamar ud-Din Khan and returns successfully. In the Aaina Mahal, Kashibai, who is pregnant, sees Bajirao embracing Mastani, who is also expecting and leaves for her mother's home. She returns to joyous celebrations months later with her newborn son, who is named Raghunath. Mastani also gives birth to a son, whom Mastani and Bajirao name Krishna Rao. After the head Brahmin priest Krishna Bhatt refuses to conduct the naamkaran (the Hindu naming ceremony) on the grounds that Krishna Rao is illegitimate, Bajirao renames his son Shamsher Bahadur. A few years later, Kashibai and Bajirao's eldest son Balaji Baji Rao, also known as Nana Saheb, returns from Satara and expresses his hatred of Mastani for disrupting his mother's marriage.

Shiva Bhatt, a Brahmin priest, informs Kashibai of a plan to murder Mastani and her son during a festival. Kashibai relays this news to Bajirao, who rescues both of them. Krishna Bhatt kills Shiva Bhatt, enraging Bajirao. To keep Mastani's safe and to grant her a royal home, Bajirao builds the Mastani Mahal for her. Bajirao, however, is heartbroken due to the betrayal of his mother Radhabai and his brother Chimaji Appa. Meanwhile, Pant tells Bajirao he must defeat Nasir Jung, the vengeful son of the Nizam. Bajirao says that although he loves Mastani, his life and allegiance is always to his cause and he leaves for the battlefield. Before leaving, he meets Kashibai in deference to a tradition that the wife sent her husband off into battle. Kashibai tells Bajirao he has broken her heart and compares their love with that of Krishna and Rukmini. Kashibai orders him never to enter her chamber again, and Bajirao accepts and leaves.

After Bajirao leaves for battle, Radhabai and Nana Saheb imprison Mastani and Shamsher Bahadur. After Bajirao receives the news, he single-handedly defeats Nasir Jung's army in his rage but collapses from his injuries. At his deathbed, Kashibai sends a letter pleading with Radhabai to release Mastani so Bajirao can recover, but Nana Saheb burns the letter and refuses to release Mastani. Bajirao, delirious due to his sickness, dies from the trauma of his hallucinations; at the same time, Mastani dies in captivity. The ill-fated lovers are shown to be united in death.