The pilot escaped with just a few scratches from the blackberry bush he landed in.
The scene unfolded in front of dozens of onlookers, many of them holiday makers, who raced to the shoreline to watch.
Many of them took their boats on to the lake to set out to help the pilot and escaped parachutists.
Michael Kelly, 49, was out on the lake fishing when he heard a noise and saw the plane hit the water nearby, about 200m from the shore.
"The plane just sort of lost altitude ... there was just a big splash."
Mr Kelly, a grocer from Wellington who is holidaying at Rainbow Point, Taupo, said he headed to the crash site, about a kilometre away.
When he arrived on the scene, there were already two other boats that had collected some of the parachutists.
A police boat arrived about 10 minutes later, followed by other emergency services and a helicopter.
For about an hour, Mr Kelly helped collect debris that was floating in the area, along with an oil slick.
Mr Kelly said the crash had been a shock but he was just happy nobody appeared to be seriously hurt or killed: "I don't want to go parachuting, that's for sure".
Civil Aviation Authority spokesman Mike Richards said it was miraculous no one was killed.
Mr Richards said more details about the crash would be released later as it was still "really, really early days" but a safety investigation team was already reviewing the incident.
Police said Victim Support had been notified and Skydive Taupo had also provided support to all of those involved.
The Transport Accident Investigation Commission (TAIC) has opened an inquiry into the incident.
"Three investigators are travelling to Taupo to commence inquiries that will focus at first on securing evidence including the wreckage, aircraft and flight information, and gathering initial accounts from those involved as well as witnesses," it said in a statement.
Police divers will assist the commission's investigators with underwater inspection and photography of the wreckage before it is lifted from the lake bed by commercial salvage experts.
A full inquiry could take up to 18 months, the statement said.
Skydive Taupo chief executive Roy Clements said in a statement that one of its skydiving planes "encountered an engine problem shortly after take-off".
"All parachutes including the pilot exited the plane and landed safely."
Taupo Mayor David Trewavas said Taupo hosted the highest number of parachute jumps in the southern hemisphere and was a large tourism activity in the area carried out by very experienced operators.
Mr Trewavas said he met the management of Skydive Taupo yesterday afternoon.
"They were about to have debrief, everyone was coming back to the base ... and obviously comforting all the participants.
"Everyone is okay, that's the main thing. A bit shaken. We are just offering the operator support, I think there was a mix of international and domestic participants, so what we are saying is that anything we can do to help, we will."
The pilot of the plane landed in a blackberry bush, Mr Trewavas said. He and others on board should be praised for the way they handled the situation.
"There is nothing much you can do about an engine malfunction. Things kicked in to gear and everyone was evacuated safely.
"And it just shows the experience of the operators and how well-equipped they were."
- Additional reporting NZME.
