Murli Prasad Sharma alias Munna Bhai, a gangster who is in love with the voice of Janhavi, a radio jockey, devises a plan to meet her when she announces a quiz contest featuring the life and beliefs of Mahatma Gandhi, to be aired on 2 October, the birthday of Gandhi. To prepare for the contest, Munna's sidekick Circuit kidnaps and bribes a group of professors to provide the answers for Munna. After winning the contest, Munna is granted an interview with Janhavi wherein he presents himself as a professor of history and a Gandhi specialist. Janhavi subsequently asks Munna to present a lecture on Gandhi to a community of senior citizens who live in her home, called the 'Second Innings House'. To prepare for this event, Munna engages in intense study at a Gandhi institute. For three days and nights without food or sleep, Munna reads about the life and ideologies of Gandhi.

It is during this period he studies so much that he gets hallucinations of Gandhi, which he addresses by his nickname "Bapu" ("father"), appears and offers help and advice to Munna. Gandhi encourages Munna to tell the truth about himself to Janhavi, but Munna resists this advice. With Gandhi's help, Munna succeeds in impressing Jahnavi and cultivates a new lifestyle based upon Gandhism. Munna starts to co-host a radio-show with Janhavi and Gandhi's image, guiding his audience to use Gandhigiri to solve everyday problems.

Lucky Singh, an unscrupulous businessman, employs Circuit and Munna Bhai to conduct underworld activities for him. His daughter Simran is engaged to marry Sunny, the son of the powerful businessman Kkhurana. Kkhurana is superstitious and his activities are controlled by his astrologer, Batuk Maharaj, whose particular use of numerology led Kkhurana to add an extra "K" to his real name (Khurana) as well as to the conclusion that the 'Second Innings House' would be the most auspicious place for Sunny and Simran to live. Maharaj also convinces Kkhurana to reject the marriage between Simran and Sunny when it is revealed that Simran is considered to be a manglik (an individual whose Vedic astrological makeup is believed by some to be devastating for marriage, mostly leading to the death of the spouse after a certain calculated period of marriage). Lucky tricks Kkhurana by saying that one of his typists had entered the wrong time of birth. Lucky appropriates the 'Second Innings House' by sending Munna to Goa (keeping him out of the way) and then blackmailing him to let the matter pass or risk losing his love Janhavi. In response, Munna launches a "non-violent" protest to reclaim the house. He calls this protest "Get Well Soon, Lucky" and asks his radio show's audience to send Lucky flowers to help him recover from the "disease of dishonesty".

During this time Munna tells Janhavi the truth (via a letter he gives to her). Heartbroken, Janhavi leaves Munna. Munna receives another setback when he is tricked by Lucky into revealing his conversations with Gandhi before a public audience. At this conference, Munna finds that only after he has learned something about the real Gandhi's life can the Gandhi image talk about it, which serves as proof for a psychiatrist in the audience that Munna is delusional.

Later, during Sunny and Simran's wedding, it is revealed to Simran that she is a manglik and she goes to the railway station adorned in her wedding dress to suicide as she does not want to start a relationship based on a lie. But the taxi driver is Victor D'Souza, a man whose problem was solved on Munna's radio show. He explains to her that suicide is not the right choice and contacts Munna for advice. He comes directly to the wedding and cleverly questions the astrological Maharaj and attempts to persuade Kkhurana to allow the marriage to happen. However, Kkhurana is not convinced due to his stubbornness and tells Sunny to leave with him in the car. Nevertheless, Sunny objects and Simran and Sunny exchange garlands.

Gandhi's monologue at the end of the film, however, questions this conclusion. Munna, despite these defeats, continues to use Gandhigiri, a decision that transforms Lucky, revives Janhavi's affection. A Second Innings couple adopt Circuit as their son and Sunny and Simran had a happy life. Lucky, then begins studying Gandhism, Gandhi and Gandhigiri, resulting in him too hallucinating Gandhi. Kkhurana has also removed the extra K in his name to become Khurana only, denying Maharaj's false prediction.

• Sanjay Dutt as Murli Prasad Sharma (Munna Bhai)
• Arshad Warsi as Circuit, Munna's sidekick
• Vidya Balan as Janhavi, a radio-jockey and Munna's love-interest
• Boman Irani as Lucky Singh
• Dilip Prabhavalkar as the image of Mahatma Gandhi
• Dia Mirza as Simran, Lucky's daughter, engaged to Sunny
• Jimmy Sheirgill as Victor D'Souza, who having lost his father's money, needs Munna's advice
• Kulbhushan Kharbanda as Kkhurana, a wealthy but superstitious businessman
• Saurabh Shukla as Batuk Maharaj, Kkhurana's astrologer
• Abhishek Bachchan as Sunny, Kkhurana's son, engaged to Simran (cameo)
• Rohitash Gaud as Kukku (Lucky's Sidekick)
• Parikshat Sahni as Victor's father
• Ashwin Mushran as Hari Desai
• Hemu Adhikari as the Retired teacher
• Priya Bapat as the girl who calls Murli
• Ninad Kamat as the Lawyer
• Kurush Deboo as Dhansukh Bhai Patel, Gujarati Lawyer
• Arun Bali as a Second Innings Resident
• Achyut Potdar as a Second Innings Resident
• Atmaram Bhende as a Second Innings Resident

The Munna Bhai series began after Vidhu Vinod Chopra agreed to produce Rajkumar Hirani's 2003 film Munna Bhai M.B.B.S. when no one else would (Hirani had worked as an editor on Chopra's 2000 film Mission Kashmir). They also collaborated on the script. Munna Bhai M.B.B.S. was a runaway success that prompted the duo to contemplate a sequel. The sequel was initially known as Munnabhai Meets Mahatma Gandhi and was later titled Munnabhai 2nd Innings before the title Lage Raho Munna Bhai was finalised.

Hirani admitted in an interview that he felt the burden of expectation while writing the screenplay for Lage Raho Munna Bhai, as he had to create "something to match" the first film. Initially there was some effort to incorporate scenes or characteristics of the first film into the sequel (such as the idiosyncratic laugh of Asthana, portrayed by Boman Irani in the first instalment), but the risks of repetition were consciously averted.

One of Hirani's goals in making the film was to revive an interest in Mahatma Gandhi, a figure whom he felt had been forgotten in contemporary India. To highlight this fact, Hirani recounted (during an interview) an incident with a chaiwala boy (who brings tea to the crew) during production:

The boy was curious, he was a big Munnabhai fan and kept asking the name of the film. The first working title was 'Munnabhai Meets Mahatma Gandhi,' and Shantanu (Moitra, the music director) told him. So he said, 'Munnabhai to theek hai, yeh Mahatma Gandhi kaun hai?' ('Munnabhai is fine, but who is this Mahatma Gandhi?') So this is the sad state of affairs today. I was shocked. And it's not just the chai-wallah. A few days ago on TV a lot of politicians were asked India-related questions on the news channels, and I can't believe a lot of them don't know 2 October is Gandhiji's birthday! Many didn't know his first name. They kept saying, 'what's in a name, we respect his ideals,' but come on! How can you not know his name?

The other screenwriter, Abhijat Joshi (who teaches in the department of English at Otterbein College in Westerville, Ohio), stated that he had been conducting extensive research on Gandhi, which inspired producer Chopra to involve Joshi in the creation of the second Munna Bhai screenplay.

While writing the screenplay, Hirani and Joshi stayed together for more than four months. They developed scenes by going out for a walk and discussing the scene. They would not return home until they had created a scene that would make them laugh, or cry, or had some provocative thought. While there was a shortage of resources during the shooting of Munna Bhai M.B.B.S., the crew did not encounter a financial crisis during the filming of Lage Raho Munna Bhai, as the team managed to receive whatever was deemed necessary (including a Jimmy Jib, a specific kind of camera crane, just for a single crane shot). The film was shot on location in and around Mumbai, with Goa as a backdrop for the "Aane Charaane" song.

Only two characters—those of Munna Bhai (portrayed by Sanjay Dutt) and Circuit (portrayed by Arshad Warsi)—were retained from Munna Bhai M.B.B.S. Several actors from Munna Bhai M.B.B.S., appeared in Lage Raho Munna Bhai as different characters. Vidya Balan was chosen to play the leading lady Jahnavi as her voice was thought to be appropriate for that of a radio jockey.

The actors used several techniques to develop their characters. Warsi encountered some initial problems reviving his character from the first film. Hirani recalled that on the first day of the shoot when Warsi said his first line, "he didn't sound like Circuit at all. He sounded like Arshad Warsi speaking with an accent." Warsi admitted that he had "forgotten" the character of Circuit and had to watch the DVD of Munna Bhai M.B.B.S. three times before being able to film the scene correctly. Dutt also confessed that he had to watch the first film eight to nine times to recapture the "persona" of Munna Bhai. In addition, Dutt stated in an interview that he did not read Gandhi's autobiography The Story of My Experiments with Truth as a preparation for Lage Raho Munna Bhai. Rather, he comments, his father, Sunil Dutt (who portrayed Munna Bhai's father in Munna Bhai M.B.B.S.) and his mother (the late actress Nargis) were his role models as they "were basically Gandhians. We were brought up with those values."

Dilip Prabhavalkar, who portrays Gandhi, read Gandhi's works "once again" to prepare for his role. Boman Irani prepared for the role of Lucky Singh by spending time with Sardarjis (male Sikhs) in auto spare parts shops to research his role. Vidya Balan met with a couple of radio jockeys and watched them at work.