Khaalujaan "uncle dear" (Naseeruddin Shah) and his nephew Babban (Arshad Warsi), a thief duo, pose as a Nawab and his attendant and manage to run away with a prized necklace from a jewellery shop. During the police chase, they get separated; Babban escapes, while Khalujaan is injured. Months later, Babban traces Khalujan, again posing as a nawab, this time at a poetry contest. It is a mushaira (gathering of poets) organised by Begum Para (Madhuri Dixit), the widowed Begum of Majidabad, supposedly in compliance with the wishes of her deceased husband. The winner of the poetry contest will win the widowed Begum as his bride, and become the Nawab of Majidabad.

Babban traces Khalu Jaan on the opening night of the contest. There is another adventurous rascal in the fray, a local MLA-gangster named Jaan Mohammed (Vijay Raaz), who is making the poet Nawab Italwi (Manoj Pahwa) write poetry for him to recite at the contest. The contest proceeds; while Khalujaan has his heart set on Begum Para herself, Babban falls in love with her maid, Muniya (Huma Qureshi). Khalujaan tries to impress the Begum by giving her the prized necklace which he had stolen earlier, but on the final day, Begum declares Jaan Mohammed to be the victor. She declares that she will marry him and then he will become the new nawab of Majidabad.

Since the necklace has clearly failed to move the Begum, Khaalujaan decides to see if a gun will serve the purpose better. However, even as he approaches the Begum brandishing his chosen instrument of persuasion, he finds the dowager being hustled away at gunpoint by a masked man. Khalu Jaan chases them and blocks their way only to discover that the masked man is none other than his nephew Babban. It turns out that the Begum had plotted her own kidnapping in order to extort money from the nawab-elect (Jaan Mohammad). More twists are then revealed: the Begum was nothing but a dancing-girl (courtesan) who had seduced a middle-aged nawab and married him, only to find that the nawab was actually a pauper who supported his lavish way of life by selling his inherited properties and jewels. He also neglected his wife, who (it is very strongly suggested) developed a relationship of intimacy with a sympathetic maid-servant, Muniya. By the time the nawab died of good living, he had become completely bankrupt and even his palace had been mortgaged to the money-lenders. After his death, the penniless Begum had been helped financially and courted by Jaan Mohammad, a local rich man who was besotted with her and wanted to marry her. He also wanted the title and status of being the "Nawab of Majidabad", which according to the movie would be conferred on the man who marries the widowed Begum (this is a silly narrative device, such a thing can never happen in India).

However, Jaan Muhammad was a man of low birth and uncultured mannerisms, a former street-thug, turned businessman, turned politician, who even employed a bunch of beefy goons to promote his business and political interests. The idea of marrying such a man was repellent to the Begum, who was any way in love with her maid-servant. It was also socially unacceptable, which is what the Begum tells Jaan Mohammad. It is he who comes up with the idea of holding a contest. The birth and breeding of the man who wins the contest will be irrelevant; the begum can say that she had no choice but the marry the winner. Thus, the mushiara itself is an elaborate hoax: the late nawab had never stipulated that his widow should marry someone else, much less that the winner should be recognized as "nawab of Majidabad." It was the Begum's own idea, the purpose being to snare a rich man and marry him. The Begum did not want to marry Jaan Mohammad, but she wanted his money, therefore she was staging a kidnapping in order to receive a ransom from Jaan Mohammad. She has employed Babban to act as her kidnapper and extort a hefty ransom from Jaan Mohammad, who was expected to pay up because otherwise, he would never fulfill his dream of becoming a Nawab.

Babban duly phones Jaan Mohammed (who is by now aware of the Begum's cunning plan) to bring a ransom of 10 crore (100 million) rupees in cash to the railway station. All four of them (Begum, maid, and the uncle-nephew duo) reach the railway station to collect the money, but find that they are surrounded by Jaan Muhammad's goons and henchmen. To their good fortune, Nawab Italwi arrives with a police force and cross-firing starts (it turns out that Nawab Italwi also is not what he seems to be; he is a policeman in disguise). Begum and Muniya escape from the situation leaving behind Babban and Khalu Jaan to be arrested. Two months later, the uncle-nephew duo get bail and, as they leave the jail, they are given a letter from Begum and Muniya. It is a cheeky letter of thanks and goodbye from the women, informing the men that they have sold the priceless necklace and used the proceeds to buy a house and settle down in a faraway town whose name they withhold. Uncle and nephew are now exactly at the same situation where they were at the start of all these shenanigans—the movie ends with the duo once again surrounded by Mushtaq (Salman Shahid) and his gang of rowdy vagrants.