Richard (Leonardo DiCaprio), a young American backpacking in Thailand, has come to Southeast Asia with the intention of experiencing something radically different from his familiar life. He meets Daffy (Robert Carlyle), who is crazy and rants about a beach paradise and the parasites of civilization. Later Daffy commits suicide but leaves Richard a map to the beach. According to rumor the island is a beach paradise and the island has unlimited marijuana.
Richard meets Françoise (Virginie Ledoyen) and her boyfriend, Étienne (Guillaume Canet), and convinces them to accompany him to the island. They travel from Bangkok to the shores of Koh Phangan in the Gulf of Thailand, where Richard befriends a pair of American surfers who mention the urban myth. He does not admit his knowledge but copies his map and slides it under their door.
To reach the island, Richard, Françoise and Étienne must finally swim there. When they first arrive on the island, they come across an enormous marijuana plantation guarded by local men armed with AK-47 assault rifles. They manage to evade detection and find the community of travelers. They are seen by Keaty (Paterson Joseph), who takes them to the beach community. They are interrogated by the island's leader Sal (Tilda Swinton) regarding their knowledge of the island but are accepted into the community.
One night while Richard and Françoise are walking down the beach, she tells him that she is falling in love with him. They swim out into the ocean to look at a swarm of bioluminescent plankton, where Françoise kisses Richard and the two proceed to have passionate sex on the beach. They decide not to tell anyone about their romance, but soon everyone on the island finds out, including Étienne. Although devastated, Étienne says he will not stand in their way if Françoise is happier with Richard.
At first the island and its community seem to live up to their reputation. Richard swims out into the ocean to catch fish with a harpoon and is attacked by a young mako shark, but he stabs it to death with a knife — which gains him much admiration. Events take a turn for the worse when Richard is chosen to accompany Sal to the mainland to acquire supplies, where the two American surfers see Richard. Sal overhears their conversation about the copy of the map and confronts Richard, who admits his guilt. In exchange for Sal's silence and Richard's return to the island, Sal blackmails Richard into a sexual encounter.
When they return to the island, everything returns to normal, until the Swedes are attacked by a large shark. Sven dies and Christo is severely injured. The only options for Christo are to go to the mainland to get medical help or stay on the island and take his chances, but Sal refuses to allow a doctor to come to the island. Christo chooses to stay, not wanting to go near the water after his encounter with the shark. Christo's condition worsens and the community becomes annoyed with it, so they take him out into the middle of the jungle to die. All of them seem fine with this decision except for Étienne, who stays with him. Later, Sal observes that the American surfer friends of Richard are on the neighboring island and charges Richard with the task of watching them so he can obtain the map or destroy it. While he's waiting for the surfers to arrive, Françoise shows up, furious and heartbroken, saying that Sal has told everybody about her and Richard's sexual encounter. Richard cannot cope with his task and retreats into the forest, where he becomes temporarily insane, believing that he is communing with the long-dead Daffy. He evades the other islanders and sets lethal traps in an attempt to keep them at bay, at times hallucinating that he is a character in a video game.
Meanwhile, the surfers reach the island but are discovered and killed by the marijuana farmers. Richard returns to the community to convince Étienne and Françoise to leave the island, believing that all their lives are now in danger. Étienne refuses, not wanting to leave Christo, whose leg has become gangrenous. Richard ends up smothering him when the other two leave the tent. After this Richard leaves the tent and is hit by a farmer across his face,leaving him unconscious. He wakes up in a tent where he is in pain, the farmer releases 5 bullets, but he keeps one, which is meant for Richard. The farmers approach Sal, with whom they had an agreement; the travelers may continue to live on the island so long as it remains a secret. The head farmer gives Sal the pistol with which to shoot Richard. Sal's partner, Bugs, pins Richard against the main support of the structure and Sal pulls the trigger, but the chamber is empty. Nevertheless, when the rest of the community sees the lengths that Sal is willing to go to for the sake of the community, they leave the island. Sal, however, stays behind.
The film ends with Richard stopping by an internet cafe to check his e-mail, he receives from Françoise a photograph of the beach community, with an animated handwritten inscription over the image: 'Parallel Universe. Love, Françoise x'.