Khusti is set in a village in North India, notorious for its obsession with wrestling. Even the trusteeship of the village temple is decided by an annual wrestling match. This match has been fought for the past many years by two fierce opponents, Jiten Singh (Om Puri) and Avtar Singh (Sharat Saxena)
Avtar Singh has a young and beautiful daughter “Ladli” (Nargis). She is a big fan of Salman Khan.
One day, Chander (Rajpal Yadav), the new Postmaster arrives. Chander meets Ladli and falls in love with her instantly. However he is scared to approach her as he finds out that he is the daughter of the ferocious ex-wrestler, Avtar Singh. He waits for his chance.
One day Chander sets out to distribute letters as usual. But he mistakenly mixes up letters of Jiten Singh and Avtar Singh and each one gets the other’s letter. This simple mistake proves to be a disaster for Jiten Singh. A letter written to him by the village prostitute with whom he is having a secret affair falls into Avtar Singh’s hands. He calls in the village panchayath and exposes Jiten Sing.
Following some goof-up by the Government. Yet another Postmaster arrives to take charge of the same Post office. The new Postmaster finds out Chander’s fascination with Ladli and he informs Avtar Singh. Infuriated, Avtar Singh sends his men to have Chander all beaten up. Jiten Singh jumps into the fray deciding it is a good time to hit back at Avtar Singh.
To pacify the crowd Avtar Singh agrees to give his daughter’s hand to Chander in marriage. But on one condition, that Chander should win a wrestling match against his wrestler.
His opponent is a Seven and a half foot tall, huge man, “The great Khali”.
How finally Chander win his love in the Kushti ring against The Great Khali.