In 1914, young Sara Crewe (Liesel Matthews) lives in India with her wealthy widowed father, Ralph Crewe (Liam Cunningham), a captain in the British Army. Immersed in Indian culture, Sara absorbs the many stories and folktales she hears from a local woman, Maya (Pushpa Rawal), from whom she adopts the mantra "all women are princesses." Her circumstances change abruptly with the onset of World War I, which requires Captain Crewe to return to the army barracks. He enrolls Sara at her late mother's girlhood boarding school, Miss Minchin's School for Girls, in New York City. As they sail for America, Sara dreads her impending separation from her beloved father, but is reminded of his devotion when he presents her with a heart-shaped locket which he had given to Sara's mother when they married. The locket contains photographs of Sara's parents, and it instantly becomes her most treasured possession.After arriving in bustling New York, Captain Crewe takes Sara to her new school. They are greeted by the warm and cheerful Amelia Minchin (Rusty Schwimmer), the younger sister of the school's headmistress and director, Miss Maria Minchin (Eleanor Bron). The senior Minchin, whose demeanor is in sharp contrast to Amelia's, greets the Crewes with honeyed mannerisms clearly influenced by Captain Crewe's wealth. Captain Crewe had spared no expense in ensuring his daughter's comfort. He secured the school's largest bedroom suite for Sara, had her beautiful clothes and toys shipped over from India, and promised large monthly payments to cover any excess utilities. Miss Minchin gives them a tour of the facilities and introduces Sara to the other pupils during their French lesson. Miss Minchin notices the locket around Sara's neck and attempts, rather sharply, to remove it, asserting that jewelry is against school rules. Sara, however, insists on keeping it, respectfully promising to only wear it in her room during personal time.To say their goodbyes before Captain Crewe's ship departs, Sara and her father are shown into Sara's splendid suite, which is fully prepared and decorated with treasures from India. Captain Crewe presents Sara with a new doll, Emily, whom he says possesses the magical power to act as messenger between them while he is away. He encourages her to believe in magic, for it must be believed to be real. Sara tearfully watches her father's carriage disappear down the road as she sits in her window, cradling Emily.Sara's first morning at school does not go smoothly. Not being used to adhering to a schedule, she is late for breakfast and is distracted when she sees her mother's photograph on the wall with other alumni. Miss Minchin, already viewing Sara as spoiled and overindulged, dislikes her further when Monsieur Dufarge (Lomax Study), the French teacher, praises Sara's fluent grasp of the language while still despairing of Miss Minchin's accent and pronunciation. Sara is chided for "talking at the table" after thanking the servant girl, Becky (Vanessa Lee Chester), for serving her porridge. Later, in a letter to her father, Sara writes that the school rules are strange to her, but she will endeavor to obey them.Once the enigma of the wealthy new classmate wears off, the other girls begin to approach Sara. A haughty older girl, Lavinia (Taylor Fry), makes no secret of her disdain for Sara's kind nature and passion for storytelling, but the other girls are entranced by Sara's mental library of Indian sagas. Sara forms a close bond with Ermengarde (Heather DeLoach), a bespectacled misfit who endures harsh treatment from both Miss Minchin and Lavinia. Sara's stories and natural empathy give her the ability to calm Lottie (Kelsey Mulrooney), the youngest pupil, who is prone to loud and frequent tantrums. Amelia Minchin, who was always charged by her sister to handle Lottie's fits, had always been unsuccessful in her attempts, and is immensely relieved that Sara is so effective.Sara is curious about the servant girl, Becky, to whom the students are expressly forbidden to speak. While the other girls seem to grasp that Becky's being African American "means something" in their society, Sara, having grown up away from American culture, sees no logical reason to avoid Becky. She sneaks up to the attic, where Becky sleeps in pitiful conditions, and witnesses Becky icing her bruised and blistered feet. Becky notices Sara and, startled, tells her they will both be in trouble if Sara comes to the attic again. Sara, saddened by Becky's situation, later leaves her a gift of splendid fur-trimmed slippers and a note of friendship.It soon becomes habit for most of the girls to sneak into Sara's room at night to listen to her stories. She had been telling them, in installments, the saga of Princess Sita, her husband Prince Rama, and the evil ten-headed demon who kept them apart. The girls know it is against the rules to leave their rooms at night, and Miss Minchin's dislike for Sara's imaginative worldview is now obvious to all the pupils, so Sara encourages them to be quiet during the stories and to leave if there is danger of being found out.The absence of her father is still weighing heavily on Sara, who clings to her doll, Emily, for comfort. She and Ermengarde both feel dejected when parents of the other pupils come to visit the school. Ermengarde's father had virtually abandoned her at school, attempting to force her to adapt to an environment that was damaging to her happiness and self-esteem. Sara attempts to cheer her up, but is saddened to watch the sea of happy mothers and fathers reunited with their daughters. With a flash of hope, Sara sees a man in military uniform and follows him outside, but her spirits are dashed when she sees he is not Captain Crewe.To celebrate Sara's birthday, as per Captain Crewe's instructions, no expense was to be spared. The girls enjoy a lavish cake, and dance in the parlor while Amelia and Ermengarde play a cheerful rag on the piano. Amid the festivities, Miss Minchin receives an unexpected visit from Captain Crewe's solicitor, Mr. Barrow (Vincent Schiavelli), who informs her in private that Captain Crewe is unaccounted for and presumed dead. As such, the British government has seized his fortune and will allow no more payments to Miss Minchin for Sara's care. As she had been expecting a rather large payment for the current month, Miss Minchin is furious and abruptly stops the birthday party, sending all the girls to their rooms except Sara. With little effort at sympathy, Miss Minchin tells Sara that her father is dead, that she has no family nor money, and she must now forfeit all her valuable belongings to Miss Minchin to cover the unpaid debt. In addition, Sara is demoted from student to servant, and is sent to the attic with a drab black frock, one book, a candle, and Emily, the one luxurious possession she was permitted to keep. Miss Minchin snatches the locket from Sara's neck, threatens to have her arrested if she withholds another valuable, and leaves her alone in the leaky attic. Sara, who had been in a horrified daze since she had heard the news, finally breaks down and weeps for the loss of her father.Sara's new life beings at five o' clock every morning, when she reports to the kitchen to help the cook with breakfast. She now serves porridge to her former classmates, whom Miss Minchin has forbidden any communication with. Ermengarde, Lottie, and her other friends are clearly distressed by Sara's plight. Sara and Becky become close friends and visit with each other through a broken plank in the shared wall of their attic rooms. Becky encourages Sara to continue telling her stories and believing in magic, but Sara is too depressed to embrace her former optimism and imagination.In the large townhouse next door to the school lives Mr. Randolph (Arthur Malet), a wealthy, elderly, wheelchair-bound man whose son, John, recently left to fight in the army. Mr. Randolph's manservant is an imposing Indian gentleman called Ram Dass (Errol Sitahal), who is constantly accompanied by a playful pet monkey. While shopping for groceries in the market square, Sara witnesses two army officers deliver the news of John's disappearance to Mr. Randolph, who is led inside weeping by Ram Dass. During her next market trip, Sara is handed a coin by a kindly boy, whose mother immediately scolds him for giving his money to a "beggar." Sara uses the coin to buy herself a bun from the bakery, but before consuming it, she sees a shabbily-dressed woman with three young children attempting to sell flowers on the street. Sara gives her treat to one of the children, and their mother insists she have a flower in return, calling her a "princess" for her action. Feeling much sympathy for Mr. Randolph's situation, Sara threads the yellow rose through the handles of the old man's front door.With the aid of Becky's friendship, Sara begins to reclaim fragments of her former positive perspective, and even enjoys herself when the two girls play a vengeful prank on Miss Minchin after witnessing her be cruel to a young chimney sweep. She also develops a cordial relationship with Amelia, who confides in Sara her displeasure with her job and her sister's treatment of her. Sara coyly encourages Amelia to pursue a future with Francis (Time Winters), the milkman, with whom Amelia had been awkwardly flirting for some time. Meanwhile, Mr. Randolph is taken to an army hospital and asked to identify an anonymous injured soldier, whom the doctors thought might be the old man's missing son. The soldier, wearing bandages around his eyes and afflicted with memory loss, is not John Randolph, but Ram Dass persuades Mr. Randolph to take the man into his home to recuperate, reasoning that the stranger might know what happened to John. Ram Dass has also taken notice of the miserable conditions of Sara and Becky, as his room at the Randolph house is adjacent to their attic quarters. He and Sara form something of a silent friendship from their respective windows.Sara's friends concoct a daring scheme to retrieve Sara's locket from Miss Minchin's office. When Miss Minchin departs on an errand, Lottie throws a false tantrum to distract Amelia. Ermengarde and a few others sneak into the deserted office and quietly search for the locket, which is soon found in a desk drawer. To their horror, Miss Minchin returns early to fetch a forgotten glove, and the girls are nearly caught in the act. Fortunately, Becky distracts Miss Minchin long enough for the girls to escape to safety. That night, Sara's friends make a risky journey to the attic to return the locket to Sara, who is touched and deeply grateful. Their reunion is halted by the arrival of Miss Minchin, who furiously sends the pupils to their rooms before descending on Sara and Becky. Though Sara hides the locket before Miss Minchin can notice it, the fact that she had been caught interacting with school pupils results in harsh punishment. Miss Minchin tells Sara that for the entirety of the next day, Becky will be locked in her attic room while Sara performs both of their workloads, and neither of them will receive any food. She attempts to break Sara's spirit further by taunting Sara's resilient "princess" outlook, but Sara stands firm in her beliefs. Miss Minchin threatens to throw Sara out if she is found with any of the girls again, and storms out in tears of rage.Becky is miserable, seeing no hope for herself or Sara, as they await their punishments. Sara resorts to her imagination, suggesting that they eat an imaginary feast that night to stave off the next day's hunger. Becky eventually is persuaded, and the girls imagine themselves beautifully dressed and enjoying their favorite foods. Ram Dass witnesses their plight from the Randolph house. In the morning, Sara awakens to a miraculous sight: the attic is decked out for a banquet, with luxurious robes waiting for her and Becky, and a table laden with a magnificent breakfast. Ram Dass, through unknown and possibly mystical means, had granted the girls' wish.Fortified by her fantastic morning, Sara is able to endure the double workload that day. After sunset, Amelia sneaks out of a window and happily runs away with Francis the milkman. Miss Minchin, unaware of her sister's departure, finally notices the absence of Sara's locket in her desk drawer and immediately goes to the attic to confront the girl. Miss Minchin is shocked by Ram Dass's fine gifts, and accuses Sara of stealing them as well as the locket. Sara asserts her innocence, but still refuses to incriminate her friends. Miss Minchin furiously informs Sara that she is going to be arrested for theft, locks her and Becky in the attic again, and leaves to call the police.With a violent thunderstorm raging outside, Sara and Becky formulate a hasty and dangerous escape plan. They use a long, narrow wooden plank as a bridge between their attic window and the ledge of the Randolph house next door. Sara, terrified but determined, promises to return for Becky, and begins to make her way across. The beam is unsteady and made slippery from the relentless rain, and Sara is several floors above street level. Just as Sara reaches the opposite ledge, Miss Minchin arrives in the attic with the police, all of whom are frozen momentarily by the sight of Sara's escape. Miss Minchin orders the police to stop her, and Sara loses her balance, nearly falling to her death. She dangles from the ledge and manages to claw her way to safety, entering the upstairs window. Miss Minchin tells the police to go next door and find her, and to take Becky as well.Sara, drenched and shaken, wanders through Mr. Randolph's house. She is startled when she encounters a man alone in the drawing room, his eyes and upper face obscured by bandages. He senses her presence, and asks her name. Sara realizes with astonishment that this is her father, very much alive and safe. She rushes to embrace him, but though he is clearly affected by her emotion, he does not remember her. Sara desperately tries to awaken his memories, and grows more panicked as the police and Miss Minchin arrive at the front door. They demand entrance from Mr. Randolph, explaining that there is a runaway child in his house. Amid the chaos, Ram Dass stands silently by as policemen drag Sara, screaming, away from her father. As Sara is being taken to a waiting police vehicle, Ram Dass influences Captain Crewe to remove his bandages and see again. Captain Crewe's mind miraculously clears and he races to the street, shouting his daughter's name. Sara breaks free from the police and leaps into her father's arms as they both weep with joy. Ram Dass looks on, chuckling knowingly.On a sunny morning soon afterward, Ermengarde, Lottie, and the rest of the girls congregate on the school's front steps to bid farewell to Sara and Becky, who are returning to India to live with Captain Crewe. Sara leaves her doll, Emily, with her friends to act as messenger between them. After hugging Ermengarde, Sara is approached by Lavinia, who, to everyone's great surprise, embraces Sara with a genuine smile. The girls wave goodbye as Captain Crewe, Sara, and Becky depart in a carriage.Miss Minchin is removed from her lofty position at the school, and is reduced to working as an assistant to the young chimney sweep she had previously mistreated.