The Inheritance of Loss explores the lives of characters who are trapped in India's class system—both the lower class and the upper class. The characters' hopes and dreams are conveyed in the novel, along with their ultimate dream of immigrating to America and finally escaping the rigid caste system of their homeland.

The story is set in the 1980s in Kalimpong, located in the northern part of India near Darjeeling. The main characters are Sai, a seventeen-year-old girl living with her grandfather, who is a judge. The judge is an educated man who attended Cambridge University but has fallen in social position due to the country's political unrest. He carries the weight of having abandoned his wife, so he feels he is paying off his guilt by allowing his granddaughter, Sai, to live with him after her parents die. Gyan is Sai's tutor and boyfriend. Other principle characters are the judge's cook and the cook's his son, Biju. Biju went to America and works illegally in kitchens in New York City. Throughout the novel, there are two story strands—one following the lives of the people in Kalimpong, and one following the life of Biju.

In Chapter 1, Sai is sitting in her home, looking at a National Geographicmagazine while waiting for her boyfriend and math tutor, Gyan. The judge is asleep in his chair, but as soon as he wakes, he expects to be served by Sai and the cook. Suddenly, Nepalese guerrillas approach the house, break in, and demand weapons. Everyone is terrified, but because they have no phone and therefore no way to call the police, the young guerrillas sit down and make themselves at home. They steal food and liquor and humiliate everyone, especially the judge, who is in the highest of the social orders represented in the house. The guerrillas also take an heirloom trunk.

In Chapter 2, the judge makes the cook go to the police to report the break-in. The police interrogate the cook, suggesting that it is he who instigated the crime because he is of a lower social class.

Chapter 3 focuses on Biju, the cook's son who lives in New York City. He works selling hot dogs for Gray's Papaya. Biju constantly compares himself to the overly confident workers he is surrounded by. They are crude and take him to a prostitute, insisting that he participate, suggesting that he is not a man unless he has sex. Biju feels humiliated and does not feel himself to be a man.

Chapter 4 returns the narrative to Northern India and the judge's home. The house has been ravaged by the police and still the intruders have not been identified. The cook no longer has his pride, and Sai is sad for him because she feels very close to the man. She tries to help him feel better.

In Chapter 5, Biju's life is highlighted again. Readers see all the kitchens in the basements in New York City where he has worked. Readers also witness his mistreatment by others who seem to despise him because he is from India. Biju is even looked down upon by Pakistanis, whom Biju personally feels are below him. He is confused because he must reassess his values. Biju realizes he is a servant like his father.

Sai's experiences when she first came to live in her grandfather’s home are recounted in Chapter 6. Previously, Sai had lived in Europe and attended a Catholic school where she had associated with Westerners. When she first rode the train to Cho Oyu and saw the common Indian workers, the nun who escorted her told her the lower classes are like animals. She claims that they use the street as a toilet and have no shame. Consequently, Sai feels she is of a higher, elite class.

In Chapters 7 and 8, more is revealed about Sai's life with her grandfather. The judge promises Sai that he will educate her because she is too good for the government school. The judge is haunted by the trunk that the thieves stole when they took their food and alcohol. That trunk had been his father's, and it makes him remember his days in England. He recalls how lonely he had been and how he left his fourteen-year-old wife. At Cambridge, he became negatively obsessed with his Indian identity: he tried to wash himself over and over again, and he began using white powder to hide his Indian features.

In Chapter 7, the judge remembers a conflict with his father. Later, he remembers working to find false witnesses to appear in court. Eventually, he rose in wealth and power and became judge.

The neighbors surrounding Sai's grandfather's home in Kalimpong are introduced in Chapters 8 and 9. They are Uncle Potty and his friend Father Booty. In addition, there are Lola and Noni, two sisters. Lola's daughter Pixie is a reporter for the BBC and is laughed at by the local Indians because she has a British accent. Lola advises her daughter to return to England and never come back.

In Chapter 10, Biju has begun his second year living in America, still working in the basement kitchens. He is once fired because a restaurant owner says he smells. Biju then takes a job in a Chinese take-out restaurant. One day, he overhears some Indian women saying they want to marry a Western man with a Ph.D., not an Indian. Biju feels depressed until he meets a friend at his next job. The man's name is Saeed Saeed. Saeed talks about India affectionately. Biju is impressed and homesick for his hometown. Saeed tells Biju that he might return to India with the money he has made.

In Chapter 11, the cook tells his story. He began serving the judge's father years at age fourteen. He feels disappointed for not having secured a cook's position with a white family. Despite his mistreatment by the family he serves, the cook makes up nice stories about how he is treated well by the judge. The lies help him keep his dignity. He needs to feel respected.

In Chapter 12, Noni and Lola arrange for Sai to have a tutor from the local college. This is where she meets Gyan. Chapter 13 focuses on Sai's maturation as she becomes a woman. She wants to look better and begins takes better care of her appearance.

Biju gets to better know Saeed, who is a black Muslim, in Chapter 14. Saeed is not an Indian, but Biju likes him anyway. Biju becomes even more confused because he was taught to hate Muslims.

In Chapters 15 and 16, the story reverts to the action in Kalimpong. The cook receives a letter from his son, Biju. Biju lies about his position in America. He tells his father that he works for a baker who has made him the manager. The cook brags about his son's position. Everyone asks him when he will go to America, and he says that his son will soon send him a ticket.

Chapter 18 takes place during the rainy season, when Sai and Gyan first meet. Gyan goes to Cho Oyu to work as a tutor and meets Sai. The judge is in a bad mood when Gyan arrives. He attacks Gyan intellectually because all Gyan knows is science. The judge recount his own youth and how he had transformed himself from a poor Indian student to a more civilized man working for the British.

In Chapter 19, Biju sees Saeed again by accident and learns that he has married an American girl whose parents like him.

Sai and Gyan's love grows as they see each other regularly in Chapter 20. The political trouble in Kalimpong is also growing, however. Gyan feels pulled toward fighting for the liberation of his people.

In Chapter 23, Gyan starts to think of Sai as being like the British. He begins to blame her for the poverty of his family. Biju finds work at the Ghandi Café, but the Indian owners exploit him and the other workers. They lower his salary, take his tips away, and make him work seventeen hours a day.

Gyan becomes more confused about his relationship with Sai in Chapters 29 to 31. He feels more and more that he should agree to an arranged marriage because it would bring honor to his family. In New York City, an American man tells Biju of the political unrest in Darjeeling. Biju calls his father, who lies and says that everything is okay. However, the phone line cuts off and Biju knows something is wrong. He wants to go back to India.

In Chapters 37 and 38, young insurgents break into Lola and Nana's house and force the sisters to serve them food and help them. Lola and Nana realise that their money and position has not protected them; rather, their social status has made them a target for the revolutionaries.

Sai searches for Gyan in Chapters 39 and 40. She finds him in a dirty shack, living in squalor. He is embarrassed and angry at her. They talk and eventually admit their love, but then he unexpectedly pushes her down in anger. Sai says he believes in the Gorka cause and cannot be with her because she is not pure, not completely Indian. Biju hates living in America and wants to return to India where he will feel important. He feels invisible in America.

In Chapters 42 and 43 Gyan feels much guilt for betraying his parents with his love for Sai. The insurgents arrive in Cho Oyu and demand that a member of the house attend a burning during a protest march. The judge volunteers the cook. The cook goes to the burning and has to say “Jai Gorkha!” during the protest march, but it turns violent and many people throw rocks at him. He manages to escape and run home. He cries for his son and wonders if he will ever see Biju again.

In Chapter 48, Biju arrives at the Calcutta airport. He feels more comfortable than he has in many years. Biju pays the insurgents to take him to Kalimpong. On the way to Kalimpong, they take all his money and clothes and beat him. He takes a dress off of a clothesline and walks home.

In Chapter 53, Biju approaches the house in a woman's gown and the cook screams out his name. They run into each other's arms. They still love each other very much, even though they have lost everything else.