In Rome, in the 1980s, famous Italian film director Salvatore Di Vita returns home late one evening, where his girlfriend sleepily tells him that his mother called to say someone named Alfredo has died. Salvatore obviously shies from committed relationships and has not been to his home village of Giancaldo, Sicily in 30 years. As his girlfriend asks him who Alfredo is, Salvatore flashes back to his childhood.
A few years after World War II, six-year-old Salvatore is the mischievous, intelligent son of a war widow. Nicknamed Toto, he discovers a love for films and spends every free moment at the movie house Cinema Paradiso. Although they initially start off on tense terms, he develops a friendship with the fatherly projectionist, Alfredo, who takes a shine to the young boy and often lets him watch movies from the projection booth. During the shows, the audience can be heard booing when there are missing sections, causing the films to suddenly jump, bypassing a critical romantic kiss or embrace. The local priest had ordered these sections censored, and the deleted scenes are piled on the projection room floor. At first, Alfredo considers Toto a bit of a pest, but eventually he teaches Salvatore to operate the film projector.
The montage ends as the movie house catches fire as Alfredo was projecting The Firemen of Viggiù after hours, on the wall of a nearby house. Salvatore saves Alfredo's life, but not before a film reel explodes in Alfredo's face, leaving him permanently blind. The Cinema Paradiso is rebuilt by a town citizen, Ciccio, who invests his football lottery winnings. Salvatore, still a child, is hired as the new projectionist, as he is the only person who knows how to run the machines.
About a decade later, Salvatore, now in high school, is still operating the projector at the Cinema Paradiso. His relationship with the blind Alfredo has strengthened, and Salvatore often looks to him for help – advice that Alfredo often dispenses by quoting classic films. Salvatore has been experimenting with film, using a home movie camera, and he has met, and captured on film, Elena, daughter of a wealthy banker. Salvatore woos – and wins – Elena's heart, only to lose her due to her father's disapproval.
As Elena and her family move away, Salvatore leaves town for compulsory military service. His attempts to write to Elena are fruitless; his letters are returned as undeliverable. Upon his return from the military, Alfredo urges Salvatore to leave Giancaldo permanently, counseling that the town is too small for Salvatore to ever find his dreams. Moreover, the old man tells him, once Salvatore leaves, he must pursue his destiny wholeheartedly, never looking back and never returning, even to visit; he must never give in to nostalgia or even write or think about them. They tearfully embrace, and Salvatore leaves town to pursue his future, as a filmmaker.
Salvatore has obeyed Alfredo, but he returns home to attend the funeral. Though the town has changed greatly, he now understands why Alfredo thought it was important that he leave. Alfredo's widow tells him that the old man followed Salvatore's successes with pride and he left him something – an unlabeled film reel and the old stool that Salvatore once stood on to operate the projector. Salvatore learns that Cinema Paradiso is to be demolished to make way for a parking lot. At the funeral, he recognizes the faces of many people who attended the cinema when he was the projectionist.
Salvatore returns to Rome. He watches Alfredo's reel and discovers it comprises all the romantic scenes that the priest had ordered to cut from the movies; Alfredo had spliced the sequences together to form a single unreduced film of aching desire and lustfull frenzy. Salvatore has made peace with his past with tears in his eyes.