Phoonk ended with the killing of Madhu (Ashwini Kalsekar), the woman who casted a black magic spell on Rajiv's (Sudeep) daughter Raksha(Ahsaas Channa) . Phoonk 2 begins with Madhu's ghost returning from the grave to seek revenge on the family. On bagging a new construction project, Rajiv moves with his family to a new place. Raksha and Rohan begin exploring the new place and the surroundings - the lonely beach and then the woods behind the house. The terror begins with Raksha and Rohan finding a doll in the woods and then it progresses to a series of highly traumatizing experiences for the whole family.

Manja(Zakir Hussain), the only man whom Rajiv could turn to, meets a gruesome death at the hands of the black magic woman Madhu's ghost, who has risen from the grave to avenge her own death... to seek vengeance on Rajiv, by torturing his loved ones - his wife Aarti (Amruta Khanvilkar) and their children, Raksha and Rohan in unimaginably cruel ways. Phoonk 2 captures the fear of a family caught hostage to a murderous, animalistic spirit seeking revenge by brutally terrorizing them. We experience a fear far larger that that of a live evil than when the dead returns to haunt you. It is the fear where every escape route of yours becomes dangerously anticipated and cunningly laid out in front of you. It is the fear that extends to letting go of one loved one to save another. Where every situation takes a sinister turn for the worse, methodically murdering everyone's hope to live.

Terrorized by the demonic force, will Rajiv give in to the ghost or will he betray his family and give up? Will the family survive as the gruesome and repulsing murders are committed, or do the disfigured bodies, visions, ghostly voices, and unsettling, disturbing incidents drive them to death? Will the ghost live with them till they become ghosts themselves?

The choice that Rajiv has to make in the final moments of the film forms a very unsettling and a highly disturbing climax.