In 1975, after serving five years of a 30-year prison sentence, Carlito Brigante is released due to a legal loophole manipulated by his lawyer, Dave Kleinfeld. Upon his release, Carlito decides to return to his old neighborhood in Spanish Harlem, hoping to make a fresh start. However, he's soon swept back into his past when he reconnects with old friends and associates. Despite his determination to leave crime behind, Carlito is persuaded by his cousin Guajiro to join him on a drug deal at a bar, which ends tragically when Guajiro is betrayed and killed. Forced to fight his way out, Carlito takes the money from the deal and invests it into a nightclub, dreaming of saving $75,000 to retire in the Caribbean.
Carlito's desire for a peaceful life is further complicated when he turns down an alliance with the ambitious Benny Blanco, a young gangster from the Bronx. He also reignites a romance with his former girlfriend, Gail, a ballet dancer who works as a stripper. Meanwhile, his old friend Lalin, who has just been released from prison and is now in a wheelchair, visits him but is caught wearing a wire. This incident alerts Carlito that District Attorney Norwalk is set on sending him back to prison.
In a twist of fate, Kleinfeld falls for Benny's girlfriend, Steffie, who serves tables at the nightclub. Benny's growing frustration leads him to confront Carlito directly and manhandle Steffie. In a heated moment, Kleinfeld brandishes a gun, threatening Benny, but Carlito steps in to prevent violence, further straining his relationship with his bodyguard Pachanga.
Kleinfeld, who has stolen one million dollars from his mob boss client, Tony T Taglialucci, finds himself coerced into providing his yacht for Tony T's escape from the Rikers Island prison barge. Despite his reluctance, Carlito agrees to help. Under the cover of night, Carlito, Kleinfeld, and Tony T's son, Frankie, set sail to execute the plan. However, chaos ensues when Kleinfeld unexpectedly murders Tony T and then kills Frankie, disposing of both bodies in the East River. The following day, Kleinfeld narrowly escapes an assassination attempt in retaliation.
Carlito soon finds himself in police custody, where he learns of Kleinfeld's betrayal through a recorded conversation. As District Attorney Norwalk pressures him to turn against Kleinfeld in exchange for his freedom, Carlito remains resolute. Despite visiting Kleinfeld in the hospital after a near-fatal incident, Carlito discovers the depth of the betrayal; Kleinfeld has sold him out. Just as the plot thickens, Carlito senses danger from a suspicious police officer, who turns out to be Vinnie, Tony T's other son. Vinnie infiltrates the hospital to finish off Kleinfeld, leaving Carlito free but still in danger.
With his plans for a new life, Carlito purchases train tickets to Miami for himself and a now-pregnant Gail. However, as he attempts to retrieve his saved money from his club, Carlito encounters Vinnie and his mob associates, who plan to kill him. Utilizing a secret exit, he slips away, leading to a frantic chase through the subway system and culminating in a showdown at Grand Central Terminal. In this gunfight, Carlito manages to eliminate his attackers, except for Vinnie, who is ultimately shot by police drawn by the chaos.
As Carlito makes his escape towards the train where Gail and Pachanga await, he is suddenly ambushed by Benny, who shoots him multiple times. In a shocking turn, Pachanga confesses his allegiance to Benny, only to meet a deadly end himself. With his last moments fading, Carlito hands Gail the money, urging her to flee with their unborn child and build a new life without him. As he is wheeled away on a gurney, Carlito's gaze drifts to a billboard portraying a woman on a Caribbean beach. The vision transforms into Gail, who begins to dance as Carlito takes his final breath.
