Vaastav opens with a family performing the annual rites of a dead person on the beach. When the young son of the deceased asks his grandmother all about the deceased, she begins to narrate the story.
As the film opens, Raghunath Namdev Shivalkar or "Raghu" (Sanjay Dutt) and his best friend Dedh Footiya (Sanjay Narvekar) (literally meaning "One and a half feet tall" in Hindi) struggle to find work in Mumbai.Raghu lives in the Mumbai suburbs with his retired father (Shivaji Satham), mother(Reema Lagoo) and banker brother (Mohnish Behl). They decide to run a pav bhaji stall. But fate steps in when Raghu and Dedh Footiya accidentally kill a customer who turns out to be the brother of a notorious gangster, Fracture Bandya. Now on the run, the two of them soon end up killing Fracture Bandya and his men also, when the latter tries to find them and kill them both treacherously by arranging a meeting through Suleiman Bhai(Paresh Rawal), a middle man in the Mumbai underworld. Raghu and Dedh footiya now end up in the Mumbai underworld.
Vitthal Kaanya (Ashish Vidyarthi), a rival gang lord, offers Raghunath (Raghu) and Dedh Footiya protection and later hires them both as hitmen. Raghunath becomes a respected hit man, with Dedh Footiya as his accomplice. With Raghunath in his gang, Vitthal Kaanya hits a peak in the Mumbai underworld. Later Raghunath is approached by the home minister Babban Rao (Mohan Joshi) and who asks Raghunath to work for him and uses Raghunath for his needs. Raghu agrees, much against the wishes of Assistant Inspector Kishore Kadam (Deepak Tijori), a good friend of Raghu,who continues to help him by advising him and providing inside info. Vitthal Kaanya is soon killed by rival gangsters.
While Babban Rao relies on Raghunath, there are some others who despise Raghunath and are waiting in the sidelines to see when he makes an error. Raghunath does so: Babban Rao is soon under serious pressure from the public and government. He issues a shoot-to-kill warrant for Raghunath. Dedh Footiya gets killed in an encounter. Then Raghu comes to know from Kishore that the police have been ordered to kill him in an "encounter." Raghu is now on the run, both from the police and Babban Rao?s men. Raghunath knows now that he must protect his wife, parents, and family, as they too are in danger.He realizes that there is no escape from this harsh reality. He arranges to meet Babban Rao with the help of Suleman Bhai (Paresh Rawal) and kills Babban Rao as he would spoil others? lives like his, in the future. In the process, Suleiman Bhai also gets killed.
Unable to save himself from the police, Raghu comes back to his home and tells his mother to save him. He apparently has become crazy and starts hallucinating. His mom takes him away to safety. She remembers how Raghu had once taught her how to use a gun; she pulls the trigger and kills him.
As the film ends, we see the family fulfilling the annual rites of Raghu on the Mumbai beach,as the film had begun, with Raghu?s mother explaining all that happened to his young son.