‘Shootout at Wadala’ is about a conscientious college student is wrongly accused of murder. Post his jail break, he attempts to take over the Mumbai mafia. Does he succeed? Or does he succumb to the law?

Based on a true story, it is the first-ever registered encounter by the Mumbai Police, which took place on November 1, 1982. In a police van, Afaaque Baaghran (Anil Kapoor) listens to the story which is narrated by a gangster Manya Surve (John Abraham) who is grievously injured with a bullet-riddled body. Manya Surve is powerful gangster who thinks he isn't a "chutiya" after a brawl with Dilawar.

Manohar Surve alias Manya Surve, is a decent student of Kirti College, Dadar. He is equally good in studies and in nature, which had just finished his exams even whilst Vidya is trying to distract him for answers. Vidya asks him why he doesn't give the answers and Manya replies that even though they are in love he will not do anything stupid to stop him from being successful. Vidya understands and persuades Manya to take her to meet his parents. Whilst presenting his girlfriend Vidya Joshi (Kangna Ranaut) to his mother to discuss their marriage, Manya is interrupted by his older brother Bhargav Surve. Bhargav is a gangster who is after an underworld don named Bhatkar (Ranjeet).

Soon enough, Bhargav is attacked by Bhatkar's goons, and beaten up. Manya jumps in to save him. While Manya Surve clutches one of the goons, Bhargav stabs the goon and he dies on the spot. On the day of Manya's exam results, before he can discover his grades, Manya and his brother are arrested and publicly humiliate Manya in colg by Insp. Ambolkar (Raju Kher) and end up in Yerwada Prison. In prison, another convict named Munir (Tusshar Kapoor) saves Manya from being attacked by a goon named Potya (Chetan Hansraj), during lunch time. In this assault, Bhargav is killed. Munir befriends Manya and another convict named Veera. Veera trains Manya to become stronger. Manya trains and then eventually is challenged by Potya. Manya takes the lead by staying in front of Potya during the whole fight. Soon enough, Potya attacks him from behind and beats Manya up, to which Manya responds by stabbing Potya to his death.

Later on, both Manya and Munir escape from the prison while they were working on a railway track and try to join hands with two brothers who rule Mumbai's deals. The first brother, Zubair Imtiaz Haksar (Manoj Bajpai) is cool, who is impressed by Manya. However, the second brother, Dilawar (Sonu Sood), disapproves of Manya and dislikes him. After this act Manya forms his own gang which consists of him, Munir, Veera and Gyancho, a sharpshooter, brought by Munir. Soon enough, Manya finishes off Bhatkar (the gangster who had him and his brother arrested). Jamal, Bhatkar's bodyguard also joins them. Next Manya brings Ambolkar to his knees by beating him brutally in public. The story next shows the death of Sadiq, (Arif Zakaria) unscrupulous news reporter, due to the Mastan. This breaks a fight between Haskar brothers and Mastan. Due to this a truce is called by Haji Mastan (Akbar Khan). The truce was short lived as Mastan asked Manya Surve to finish Zubair. After Zubair's assassination, Dilawar with the help of Jamal kills Gyancho. He was about to kill Munir when Manya saved him. Later Afaaque is asked to kill Manya by Dilawar. Even after his refusal at first he agrees when police commissioner (Jackie Shroff) orders him to. The story comes to an end after the shootout and Manya's killing.