The story begins in Feudal Japan with InuYasha, a half-demon (han'yō) stealing the Jewel of Four Souls, a jewel that can increase anyone's powers enormously, from a village. He does not get far before Kikyo, the young miko of the village, shoots InuYasha with a sacred arrow which seals him indefinitely to Goshinboku, a sacred tree in the nearby forest. Mortally wounded, Kikyo tells her younger sister, Kaede, to burn the jewel with her body to prevent it from falling into the hands of evil.
In modern Tokyo, a junior high-school girl named Kagome Higurashi is on her way to school. She stops in the well house of her family's Shinto shrine to retrieve her cat, Buyo, when a centipede demon emerges from the well and pulls her into the Sengoku period of Japan.
Not knowing where she is, Kagome wanders around a forest near the well. She spots Goshinboku off in the distance and proceeds towards it. When she reaches the tree, she finds InuYasha, who is still sealed with an arrow to the tree in an enchanted sleep. Villagers seize her and take her to the old priestess, Kaede. Recognizing that Kagome is the re-incarnation of her sister Kikyo, Kaede tells the story of Kikyo and InuYasha.
The centipede attacks again, and Kagome is forced to release InuYasha from his enchantment to kill it. After he defeats the centipede, InuYasha tries to take the Jewel of Four Souls from Kagome. To prevent that and save Kagome's life, Kaede casts magical prayer beads around InuYasha's neck so that Kagome can subdue him.
The jewel attracts more demons, and in a battle against a carrion crow demon, the jewel is shattered into numerous shards spread across Japan.
Kagome and InuYasha set out to collect the shards and restore the Jewel of Four Souls. Along the way they befriend Shippo, a fox demon, Miroku, a cursed monk, and Sango, a demon-slayer whose brother was possessed and forced to slaughter the rest of their village. The group encounters many friends and foes during the adventure including: InuYasha's older half-brother Sesshomaru, Kikyo who was resurrected with part of Kagome's soul, Naraku who tricked Kikyo and InuYasha into turning against each other, and a wolf demon named Koga who is in love with Kagome and constantly bickers with InuYasha.