In 1935, Indiana Jones narrowly evades capture by the infamous crime lord, Lao Che in Shanghai. Accompanied by the resourceful eleven-year-old sidekick, Short Round and the glamorous nightclub singer, Willie Scott, Indiana manages to flee on a plane—unbeknownst to them, it is owned by Lao. Unfortunately, the pilots abandon the plane, leaving it to crash over the treacherous Himalayas. However, the trio miraculously escapes using an inflatable boat and rides the tumultuous river below.
They find themselves in Mayapore, a forlorn village in northern India, where the distressed locals, believing that they are emissaries of the Hindu god Shiva, implore their assistance. The villagers seek Indiana's help in recovering the sacred Sivalinga stone, which has been stolen from their shrine, as well as rescuing the kidnapped children, who have fallen into the hands of dark forces at nearby Pankot Palace. During their journey to Pankot, Indiana speculates that the stone may be one of the legendary Sankara stones, which promise wealth and glory to their bearers.
Upon their arrival at Pankot Palace, they are graciously welcomed by its inhabitants, including the young Maharajah Zalim Singh and his representative, Chattar Lal. They are invited to stay as honored guests and enjoy an extravagant banquet, featuring peculiar delicacies such as baby snakes, large beetles, eyeball soup, and even chilled monkey brains. Despite Indiana's probing about the villagers' claims and his suspicion regarding the nefarious Thuggee cult, the palace officials remain evasive. Later, Indiana encounters an assassin during the night, which leads him, Willie, and Short Round to suspect that they are in dangerous waters. They unearth a series of concealed tunnels behind a statue in Willie’s room and embark on an exploration that tests their mettle, filled with perilous traps and a room swarming with bugs.
Navigating through the palace's hidden tunnels, they reach an underground temple where the Thuggee perform horrific rituals dedicated to the goddess Kali, involving human sacrifices. Here, they discover that the Thuggee, under the sinister high priest Mola Ram (played by Amrish Puri), possess three of the five fabled Sankara stones and have enslaved both the Maharajah and the village's children to mine for the final two stones, intending to rule the world with their power.
During a desperate attempt to reclaim the stones, Indiana, along with Willie and Short Round, is captured and separated. Indiana finds himself brutally whipped and forced to consume a potion known as the "Blood of Kali," plunging him into a trance known as the "Black Sleep of Kali Ma." Consequently, he begins to serve Mola Ram without question. Meanwhile, Willie is threatened to be used as a human sacrifice, while Short Round is condemned to toil in the mines with the other enslaved children. Displaying courage, Short Round successfully escapes the mines and returns to the temple, where he ignites Indiana back to consciousness by burning him with a torch. Unfortunately, the Maharajah, who is also ensnared by the "Blood of Kali," tries to hinder Indiana using a voodoo doll. However, Short Round bravely battles the Maharajah and manages to burn him as well, allowing him to regain his senses. The Maharajah then reveals the way out of the mines to Short Round.
In a climactic escape, Indiana and Short Round manage to free Willie, recover the three Sankara stones, and liberate the captive children. Their escape is marked by a thrilling mine cart chase that leads them back to the surface, only to confront Mola Ram and his minions on a precarious rope bridge suspended over a crocodile-infested gorge. With resolve, Indiana uses a sword that he pilfered from a Thuggee warrior to sever the ropes, forcing everyone to dangle precariously. In one final confrontation with Mola Ram, Indiana recites an invocation to Shiva, causing the stones to glow a fierce red. Two of the stones tumble into the river below, while the last one burns Mola Ram's hand as Indiana successfully retrieves it. Ultimately, Mola Ram meets his end as he falls into the river, becoming prey to the waiting crocodiles.
As the remaining Thuggee attempt to shoot Indiana with arrows, a squadron of British Indian Army soldiers from Pankot arrives in an explosive confrontation. A fierce firefight ensues, resulting in the elimination of a significant portion of the Thuggee archers, while the rest are subdued and captured. In a triumphant return, Indiana, along with Willie and Short Round, return to the village, bringing with them not only the sacred Sivalinga stone but also the liberated children, restoring peace and hope to the grateful villagers.
