After a powerful bolt of heavenly lightning strikes Ne Zha and Ao Bing simultaneously, their physical forms are obliterated. To safeguard their souls from dispersing into the void, Master Taiyi Zhenren utilizes his Seven-colored Sacred Lotus to regenerate their bodies, yet they remain delicate and unstable. Believing his son has perished, Ao Guang, the Dragon King of the East Sea, launches a devastating assault on the town, unleashing myriad monsters imprisoned beneath his palace, which includes the other three Dragon Kings of the Four Seas. Though Ao Bing valiantly stands guard at Chentang Pass, his newly formed body crumbles under the strain of the defense effort.
In a desperate bid for a ceasefire, Ao Guang proposes that Ao Bing and Ne Zha share Ne Zha's body for seven days, during which they must complete the three trials set forth by Immortal Wuliang to ascend to immortality. Success in these trials would grant them a potion capable of restoring the Sacred Lotus, resulting in a new body for Ao Bing as a reward, after which Ao Guang's forces would retreat. The trials consist of missions typically executed by the heavenly Taoist sect's demon-hunting ranks. To keep his demonic identity hidden, Ne Zha takes a sleeping pill, enabling Ao Bing to seize control of their shared body for a limited time. Together, they triumph over the first two trials, which involve battling a marauding marmot bandit clan and confronting a master who trains demons.
Meanwhile, Ao Guang assigns Master Shen Gongbao—an empowered Leopard demon—to oversee Chentang Pass and manage the remaining three Dragon Kings. Shen Gongbao unexpectedly reunites with his younger sibling, Shen Xiaobao, who reveals the troubling events of their village being attacked and plundered by the sect, which includes Ne Zha's shocking confrontation with their father. Tragically, Shen Xiaobao dies in his brother's arms after trying to defend their father during Ne Zha's second trial. As the sect gears up for the next trial, Chentang Pass suffers a devastating attack from the dragons, igniting Ne Zha's fury. He completes the third trial without Ao Bing's assistance, earning his passage to immortality and the coveted potion.
Subsequently, as Taiyi restores Ao Bing's physical form, Ne Zha, driven by vengeance for the devastation wrought upon Chentang Pass, abandons them to ally with Wuliang's forces, plotting to trap the dragons in the sect's cauldron, where they will be transformed into elixirs as retribution for their attack.
Soon, Ne Zha's parents arrive at the scene unharmed, accompanied by Ao Bing and Master Taiyi, to reveal the real story behind the chaos. In a flashback sequence, it is shown how Wuliang orchestrated an attack on Chentang Pass. Shen Gongbao uncovers Wuliang's complicity in the assault on the Shen family, and the three Dragon Kings betray their brethren by siding with Wuliang. Together, they initiate a massacre of the townsfolk, manipulating Ao Guang to serve as a pretext for obliterating the dragons and asserting the heavenly sect's supremacy. Shen Gongbao makes a final stand to protect the town, buying crucial time for Ne Zha's parents to escape.
The conflict escalates until Wuliang manages to imprison Ne Zha and his companions in the cauldron. In a heart-wrenching moment, Ne Zha cradles his dying mother as she breathes her last. Enraged by the loss, Ne Zha absorbs the cauldron's intense samadhi fire, solidifying his brand-new form. Along with the combined might of the dragons and the captives, Ne Zha and Ao Bing succeed in breaking free from the cauldron. As allies, they repel the heavenly forces in a stunning retreat. In the aftermath, Ao Guang leads the surviving dragons into seclusion beneath the waves, with Ao Bing choosing to remain behind to expose Wuliang's treachery.
In a revealing post-credits scene, Wuliang visits a secret prison to negotiate with the captive Shen Gongbao and their father, seeking to recruit them. Yet, they find themselves trapped within the prison for a decade, thanks to Wuliang’s hypnotic control over the guard, who succumbs to slumber. Ne Zha's elder immortal brothers are also summoned to confront Wuliang, setting the stage for potential future confrontations.
