The palaeogeographic reconstruction of the microcontinents on the northern margin of Gondwanaland and the tectonic evolution model of the Proto‐Tethys in the Early Palaeozoic remain controversial. The Baoshan and Lancang Blocks in SW Yunnan, China, were located on the northern margin of the Gondwana continent during the Early Palaeozoic. In this study, we present new zircon U–Pb ages and whole‐rock geochemistry data for the sedimentary rocks of the Lancang Group in the Lancang Block and the Mengtong Group in the Baoshan Block to reveal the nature of sedimentary provenance with a further tectonic evolution model of the Proto‐Tethys. Our new detrital zircon U–Pb results, in conjunction with the published age of the metamorphic volcanic rock interlayers, suggest that the Mengtong and Lancang groups were probably deposited during the Early Palaeozoic. The Mengtong and Lancang groups have similar detrital zircon age spectra and display three distinctive age peaks at 1.2–1.1 Ga, ~0.95 Ga, and 0.6–0.5 Ga. This implies that the Baoshan‐Lancang Block was situated in the transitional zone between India and Australia on the Gondwana margin and received detritus from both cratons. Combined with abundant volcanic rocks in the Lancang Group and SSZ‐type ophiolites in the Changning‐Menglian belt, the Lancang Block should be reconstructed as a continental island arc of the Baoshan Block in the Early Palaeozoic. The geochemical analysis results show that the sediments of the two strata were primarily sourced from felsic rocks in the upper crust, and they were deposited in the active continental margin. Combined with previous research, we propose a new tectonic evolution model for the Proto‐Tethys Ocean in the Early Palaeozoic, from bisubduction to collisional orogeny.