Douzi, a boy endowed with feminine features, is abandoned by his prostitute mother to an all-boys Peking opera troupe supervised by Master Guan. He befriends Shitou, a student of the troupe.A few years later, a teenage Douzi is trained to play dan (female roles), while Shitou learns jing (painted face male roles). When practicing the play "Dreaming of the World Outside the Nunnery", Douzi accidentally substitutes the line "I am by nature a girl, not a boy" with "I am by nature a boy, not a girl," and is disciplined by the instructors. Douzi along with another student, Laizi, attempt to run away, but Douzi decides to pursue acting seriously after witnessing an opera performance. Upon returning, they find the whole troupe being punished for their desertion, and Douzi is beaten. As a result, Laizi hangs himself.
An agent who provides funding for opera plays comes to the troupe to seek potentials. When Douzi repeats the same mistake in front of the agent, Shitou commands him to start over. Douzi finally whispers, "I am by nature a girl, not a boy". He delivers the entire monologue successfully, to the joy of the troupe, and secures the agent. The troupe is invited to perform for eunuch Zhang. Shitou and Douzi are brought to Zhang's house where they find a finely crafted sword, which Shitou promises to one day gift to Douzi, as the hero would do for his concubine. Zhang asks to meet Douzi in his room and sexually assaults him. Douzi does not mention this to anyone, but Shitou implicitly knows what happened. On their way home, Douzi adopts an abandoned baby, who later comes under Master Guan's training.
Douzi and Shitou become Peking opera stars under stage names Cheng Dieyi and Duan Xiaolou, respectively. Their signature performance is the play Farewell My Concubine, where Dieyi plays the concubine Consort Yu and Xiaolou plays the hero Xiang Yu. Their fame attracts the attention of Yuan Shiqing, a reputable person who attends their performances. Yuan Shiqing also possesses a sword similar to the one that Dieyi and Xiaolou found, which he gives to Dieyi. The adult Dieyi has an unrequited love for Xiaolou, but when Xiaolou marries Juxian, a headstrong courtesan at an upscale brothel, Dieyi and Xiaolou's relationship begins to fall apart. The love triangle between Dieyi, Xiaolou, and Juxian leads to jealousy and betrayal, which is further complicated by the successive political upheavals following the Second Sino-Japanese War. When Master Guan dies, the abandoned baby, now Xiao Si, comes under Dieyi's training to continue learning dan roles.
When the communist forces win the civil war, Xiao Si becomes an avid follower of the new government. Dieyi's addiction to opium negatively affects his performances, but he ultimately rehabilitates with the help of Xiaolou and Juxian. Xiao Si nurtures resentment against Dieyi because of his rigorous teachings and usurps his role in Farewell My Concubine during one performance, without anyone telling Dieyi beforehand. Devastated by the betrayal, Dieyi secludes himself and refuses to reconcile with Xiaolou. As the Cultural Revolution continues, the entire opera troupe is put on a struggle session by the Red Guards where, under pressure, Dieyi and Xiaolou accuse each other of counterrevolutionary acts. Dieyi also tells the guards that Juxian was a prostitute. To protect himself from further prosecution, Xiaolou swears that he does not love her and will "make a clean break" with her. Juxian is heartbroken and returns the sword to Dieyi before committing suicide. Afterward, Xiao Si is caught by the Red Guards when he is singing Consort Yu's lines to the mirror alone in a practice room.
In 1977,Dieyi and Xiaolou reunite, seeming to have mended their relationship. They once again practice Farewell My Concubine; Xiaolou begins with the line "I am by nature a boy," to which Dieyi makes the same mistake of finishing with "I am not a girl." As they finish their performance, Dieyi takes Xiaolou's sword and slits his own throat, paralleling the concubine's final act in the opera. Xiaolou turns around in shock, and calls out Dieyi's name, and before the screen fades to black, he meekly whispers Dieyi's name when they were children: Douzi.
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