In the teachers' common room at Brookfield, one of the masters reads the couple's wedding announcement from the newspaper:

Married at St. James' Church Bloomsbury, Katherine Mary, only daughter of the late Henry Forbes Ellis, to Charles Edward Chipping of Brookfield School.

The stunned, amused reactions of his colleagues: "Oh, it's not possible!" "Chipping, it can't be!" They assume that the lady is "plain as a post," so Max plays along with their imagined picture of her: "She's Chipping's choice...She's a good creature. Her nose is perhaps a little red...it's only indigestion, she..." When Chipping returns to Brookfield School with her, his colleagues are immediately astounded by her beauty and charm and the affectionate nickname she has given him - "Chips." She is therefore known as Mrs. Chips. Even some of the young schoolboys are overtaken by Mrs. Chipping's youthful generosity, prettiness, and wonderful nature: "She's not much older than some of us. And she calls him Chips!...She's made him buy a new suit..."

With a "revolutionary" idea, she invites all the new boys for tea and biscuits, beginning a friendly custom every Sunday at four o'clock. She captivates the young boys and also evokes his natural compassion, consideration, and kindness for his students. Following the first tea party, he wonders how the informal bantering with them will affect his classroom teaching:

Katherine: What a nice lot they are!
Chips: They certainly are when you get to know them like this, though what authority I shall have in class after these orgies...
Katherine: Ten times more, because now they look on you as a friend.
Chips: What a revolutionary you are!
Katherine: Try one of those jokes that you've always kept hidden away. See what happens.
Chips: No, Kathy. There's a limit, even to revolutions.

In the next scene, Mr. Chips takes her advice and nonetheless experiments with a Latin joke/pun in his class about the Lex Canuleia ("the law that allowed patricians to marry plebians") - his students show no reaction and don't know what to make of the uncustomary levity, and then burst out laughing with "violent appreciation." Katherine also encourages Chips to win the boys' confidence by bending the dormitory rules a bit and ignoring a goodies "box" a boy in Room 11 received from home - he lovingly quips: "Kathy, I sometimes think you're trying to pull Brookfield down stone by stone." He follows her counsel and is soon held in high regard and esteem by pupils and faculty, while coming to know details of each generation of students at the Sunday teas. Chips has been transformed by her warmth and love into a kind and much-admired teacher, and he is promoted to the long-sought-after position of housemaster.

All along, she was certain of his advancement. In the new post, they will be moved to the housemaster's place (with its name changed from "Longhurst" to "Chippings"), something that she had already presumed and anticipated: "It's a lovely old house. It's eighteenth century, isn't it?...the most imposing library for you, and a greenhouse with a grapevine. And I think we ought to have lighter paint in the hall, though. It's a little gloomy as it is...Oh, but the bedrooms are lovely. And there's a little room at the top of the stairs that I always thought would be just perfect for the nursery. Hmmm?...I'm sure that you'd be housemaster one day, just as I'm sure that one day you'll be head." Proudly, Katherine recognizes his modest inner, often-hidden qualities, and guides and nurtures his personal and professional growth into the future:

Chips: I do believe you've really meant it, too...Well, that I might be headmaster one of these days.
Katherine: My darling, you're a very sweet person and a very human person and a very modest person. You have all sorts of unexpected gifts and qualities, so unexpected that you keep surprising even me with them. Never be afraid, Chips, that you can't do anything you've made up your mind to. As long as you believe in yourself, you can go as far as you dream. Certainly you'll be headmaster, if you want to.

Tragically after just one year together, Katherine (and her infant) dies during childbirth on April Fool's Day. [A deathbed scene is non-existent - there's only an announcement of her death off-screen.] Persevering yet aghast, a dazed Chips valiantly wanders off and attends to his Latin class on the same day as a student stumbles through the lesson, in one of the film's most emotional scenes. Inappropriately, the boys pull a prank on him, leaving him envelopes at his desk with blank letters inside. When word spreads throughout the class of his wife's demise, the subdued students are suddenly awash in sorrow and silence, as he stares blankly ahead and hears the music of the Viennese waltzes that he danced to with Katherine.

More call-overs are featured in a montage of processions of boys, as the years pass through various stages of British history from the 19th to the 20th century. Each time, a few of the boys step aside and converse about news events of the day - the telephone, volunteers for S. Africa for the Boer War, Queen Victoria's funeral, and the announcement that "some French chap's flown the Channel." When bluntly and directly urged to retire in his later years (with a pension) by a new, more progressive and modernizing headmaster Dr. Ralston (Austin Trevor), the white-haired Chips, an old-fashioned relic from Brookfield's past, refuses:

Headmaster: Look at that gown you're wearing. I happen to know it's a subject of amusement to the whole school. A year ago, I told you that I wanted the new style of Latin pronunciation taught. And you totally ignored it.
Chips: Oh that! Nonsense in my opinion, nonsense. What's the use of teaching boys to say Cicero [with a hard C] when for the rest of their lives, they'll say Cicero [with a soft C], or say it at all?...
Headmaster: There you are. I'm trying to make Brookfield an up-to-date school, and you insist on clinging to the past. The world's changing, Mr. Chipping.
Chips: I know the world's changing, Dr. Ralston. I've seen the old traditions dying one by one. Grace and dignity and feeling for the past. All that matters here today is a fat banking account. You're trying to run the school like a factory for turning out money-making, machine-made snobs! You've raised the fees, and in the end, the boys who really belong to Brookfield have been frozen out, frozen out. Modern methods! Intensive training! Poppycock! Give a boy a sense of humor and a sense of proportion and he'll stand up to anything! I'm not going to retire. Do what you like about it.

The students indignantly stand behind Chips: "If Chips went, the whole school would fall down." The respected governors (alumni), chaired by Sir John Colley (Scott Sunderland) - one of his former students, also rallies to support Chips: "The governors don't want you to resign, Chips. Brookfield wouldn't be the same without you, and they know it. You can stay here until you're a hundred if you feel like it. And we hope you will." He remains at the school for five more years, becoming a revered institution at the school.

Eventually, however, he must retire: "He finally feels himself compelled to take my hint," says the Headmaster jokingly at Chips' retirement and resignation ceremony. To commemorate his years of service, the humanized schoolmaster is presented with a biscuit container, voluntarily contributed as a gift by all the boys. He sentimentally draws tears from everyone in the audience during the delivery of a farewell address:

I've seen a good many changes at Brookfield. I remember so much. I sometimes think I ought to write a book. What should I call it? Memories of Rod and Lines? I may write it one day. I may forget some things but I never forget your faces. If you come and see me in the years to come, as I hope you will, you may see me hesitate. And you'll say to yourself, 'oh the old boy doesn't remember me,' but I do remember you, as you are now. That's the point. In my mind, you remain boys, just as you are this evening...Although I am resigning, I shall still be near the school. I shall live at Mrs. Wickett's house just opposite Main Arch. Well, remember me sometimes. I shall always remember you.

As a living legend and beloved mentor at the school, the genial Chips remains on the campus. He doesn't attain the headmastership, as Katherine's convictions thought, before his retirement. He spends some of his retirement days meeting with students and former students, serving tea and biscuits. With the outbreak of World War I in Europe, a number of young students and masters from the school sacrifice their lives in the long-running conflict. The headmaster solemnly reads the names of the boys, one of whom Chips remembers was the 16 year-old youngster John Forrester (Nigel Stock) eager to be recruited. Two other past pupils - who were sworn enemies of each other as schoolboys in a fist-fight/skirmish that Chips broke up - Peter Colley (a young John Mills) and Perkins, are "off to France together." Chips remarks, with his sharp memory: "You're not fighting each other this time, eh?"

Because of a shortage of male leadership at the school during the war, Chips is called out of retirement and offered the headship when the headmaster is inducted: "If you feel equal to it, will you come back?...There's no man living who knows the school as you do. The governors want you to take over the headmastership and to hold the fort until the war's over." In memory of his wife, he carries a photograph of her under his arm as he enters the Headmaster's office and places it on the desk - he touchingly tells her spirit: "You were right, my dear. I am Headmaster after all."

A young student's impertinence and disobedience brings him to the attention of the headmaster, and Chips must teach the poorly-informed boy an appropriate lesson. When the pupil calls the masters at the school "a lot of weak-kneed women - they're not in the army because they're not fit to be, or too old, or too frightened. They're getting back on us by being tough and being tyrants," Chips (shown in an enlarged shadow) is resolved to cane the boy's backside, and then lectures:

It didn't amuse me to do that, Burton. Very soon now, you'll be an officer in France. You'll need discipline from your men and to get that you must know what discipline means. Now you despise the masters here because they're not young enough or strong enough to fight. You might like to know that every one of them has done his best to join the army. We take no man unless he has done that. I'm headmaster now simply because every man fit to be headmaster is fighting in France. I'm a war-time fluke - a temporary officer risen from the ranks. But I'm going to keep Brookfield together til the war's over.

During an air bombing raid amidst siren warnings, Chips continues to instruct his students in a classroom with blackout shades over the windows. With characteristic British fortitude, he calmly has a student recite a Latin lesson while bombs drop all around the school. And he visits with the most recent generation of Colleys - with Helen Colley (Jill Furse) and their very young son while her husband Peter is absent and off at war. He remarks to Helen that Peter ought to return home soon when peace comes: "Oh, there's every hope, Helen, hope of peace. Beats me, Helen, if I could last so long with a Colley in it." But there is "cruel news to bear" - in a school service, he announces Brookfield's war losses, including the tragic, heroic death of Lieutenant Peter Colley on the night of November 6th when "peace is so close at hand," and the fall of Max Staefel, fighting for the German side when "advancing with the Saxon regiment on the 18th of October last." The end of the war in 1918 puts Chips back into retirement.

At his fireside, a snoozing Chips is now in his late 70s. He is awakened by a knock at his door from a new student - it is yet another Colley (again Terry Kilburn) - a fourth generation Colley and the son of slain Peter Colley: "My father was here and my grandfather." The old master enjoys telling tales of earlier days and experiences with the boy's father and grandfather as he serves tea and cake. The first-time student is intimidated by Brookfield: "It's big, sir." Chips admits being afraid on his first day sixty-three years ago "to be exact," but reassures the lad: "You'll like it, though, when you get used to it." Now bolstered and confident about school, Colley apologizes as he leaves for call-over, as Chips advise: "Just walk by the master and call your name. Don't let it scare you." The boy fondly turns at the door and says goodbye - a valedictory conclusion: "Goodbye, Mr. Chips." More memories flood across the old man's mind.

Later, ill on his deathbed and in his eighties, in response to overhearing that he was a poor chap and must have had a lonely life by himself - with regrets because he never had children of his own, Mr. Chips stirs and refutes the remark:

Doctor: Poor old chap. He must have had a lonely life all by himself.
Headmaster: Not always by himself. He married, you know.
Doctor: Did he? I never knew about that.
Headmaster: She died, a long while ago.
Doctor: Pity. Pity he never had any children.
Chips: What, what was that you were saying about me?
Headmaster: Nothing at all old man. Nothing at all. We were just wondering when you were going to wake up out of that beauty sleep of yours.
Chips: I heard you. You were talking about me.
Headmaster: Nothing of consequence, old man. I give you my word.
Chips: I thought I heard you say 'twas a pity, a pity I never had children. But you're wrong...I have...thousands of them...thousands of them...and all boys!

With his eyes closed, he smiles as the camera rises up when he passes on. He dreamily remembers many schoolboys filing past to repeat their names at call-over, while the music of the school song swells in volume in the background. The final lad, the superimposed image of the last Peter Colley, appears and speaks directly into the camera:

Goodbye, Mr. Chips...Goodbye...