Taupo is located at the outlet of Lake Taupo, New Zealand's largest lake, in the northeast part of the lake where it discharges to the Waikato River. The river flows over one of New Zealand's most spectacular waterfalls, Huka Falls, a short distance north of the town. Taupo is a centre of volcanic and geothermal activity and hot springs suitable for bathing are located at several places in the vicinity. The volcanic mountain of Mount Tauhara lies six kilometres (4 mi) to the east. Some forested area exists near Taupo, with understory vegetation consisting of certain shrubs and ferns.

Taupo is situated on a stretch of State Highway 1, running concurrenly with State Highway 5. It is situated 53 km North of Turangi. It is one of the few centres in New Zealand that were never linked to the rail network.

The small but growing satellite town of Kinloch, where a Jack Nicklaus golf resort is being constructed, is 20 kilometres west along the lake.

Taupo is a tourist centre, particularly in the summer, as it offers panoramic views over the lake and to the volcanic mountains of Tongariro National Park to the south. It offers a number of tourist activities including sky diving, jet boating and paragliding.

Taupo services a number of surrounding plantation pine forests including Kaingaroa Forest, the largest manmade forest in the world, and related industry. A large sawmill is sited approximated 3 km to the north east of the town on Centennial Drive.