At Christmas time, Jim Dear gives his wife, Darling, a female American Cocker Spaniel puppy as a present. She takes to her and names her Lady where she essentially becomes the "centre of their world". Lady grows and becomes friends with her neighbour dogs; the elder Bloodhound Trusty and the feisty Scottish Terrier Jock. Meanwhile, a homeless Schnauzer-mutt, who later goes by the name Tramp, spends his days wandering the streets of Savannah, Georgia in search of food and causing trouble for the vengeful dog catcher Elliot. After freeing his friends Bull and Peg from Elliot's carriage, he makes a run for it and ends up in the Dears' backyard. Lady, who is beside herself after being ignored by the adults, finds Tramp and tries to give away his position until he points out that Darling is clearly having a baby. He warns her that her owners will keep ignoring her and the baby will replace her, but she disbelieves him. Trusty and Jock distrust the "street dog" and send him away. Before gladly leaving, Tramp warns them that "when a baby moves in the dog moves out". Jim and Darling have a baby girl named Lulu who they soon devote their lives to ("La La Lu"). They even stop listening to Lady's warnings of a rat that has been plaguing the house and start putting her outside. Lady begins to realise Tramp was right.
One day, Jim and Darling take Lulu out and leave Darling's Aunt Sarah to look after Lady for them, though she had really hoped to look after Lulu. As she goes upstairs to practice her singing, her two trouble-making cats, Devon and Rex begin to destroy the house with Lady caught in the middle ("What a Shame"). Believing Lady to be the cause of it all, Aunt Sarah takes Lady to the pet store to have a muzzle placed on her. Lady runs away, but gets trapped in an alley and threatened by a street dog named Isaac. Luckily, Tramp arrives to save her and then helps her remove her muzzle with a beaver statue before opting to take her home by taking the "scenic route" so as to avoid Elliot since Lady left her collar behind. They end up growing close and Lady accepts Tramp's offer to eat at "Tony's", his favourite restaurant ("Bella Notte"). Afterwards, Tramp shows Lady the view of the town and reveals that he too had owners, but they abandoned him once they had a baby. They get found by Elliot and are chased to the train station where Tramp sleeps. Though Tramp tells Lady to run, she returns to help him and gets captured instead. Tramp hesitates before escaping. Lady meets with Peg, Bull and the other pound dogs who all talk about Tramp and his exploits ("He's a Tramp"). The next morning, Jim and Darling pick up Lady and kick Aunt Sarah and her cats out, presumably forever, for the way she mistreated Lady. Lady begins to bond with Lulu.
Sometime later, Tramp discovers that Peg and Bull have both been adopted, causing him to further regret leaving Lady behind. He goes to her house to apologise and while she appreciates it and still loves him, she does not want to leave her family again. They say their farewells and Tramp leaves just as a thunderstorm begins. However, the rat returns and sneaks into Lulu's room. Lady is put away just as Elliot arrives to interview Jim and Darling and tell them about Tramp. She manages to call Tramp who sneaks into the house and kills the vicious rat, getting injured in the process, but accidentally knocks over Lulu's crib. He is caught by Jim, Darling and Elliot who assume he was attacking Lulu. Just as Elliot takes Tramp away to be euthanized, Lady uncovers the rat and proceeds to chase down the carriage with Trusty and Jock's help. The dogs catch up to the carriage and scare the horses, causing the carriage to collapse. Lady finds Tramp seemingly dead from the crash and begins to cry but he eventually wakes and they reunite. The Dears arrive, having realised that Tramp was protecting Lulu, and decide to adopt him, saving him from Elliot.
By next Christmas, Tramp has been fully accepted into the Dear household and given his own collar while Jock's owner has adopted two young puppies named Dodge and Ollie who Trusty and Jock take to like an uncle and aunt. Lady and Tramp happily spend the holidays with their perfect family, never to be parted again ("Peace on Earth").