Inuyasha tells the story of a modern-day Japanese girl named Higurashi Kagome whose family lives in an old shrine. On the shrine grounds, there is an old covered well, about which there is a legend, as well as an ancient Goshinboku God-Tree, and her grandfather's shop selling mystical trinkets...in fact, nearly everything about the house has a legend of some sort attached to it. Kagome has grown up thinking that the legends are simple superstitions, but when a monster reaches out of the ancient "Bone-Eater's Well" one day and drags her into Japan's distant past, she has to quickly come to terms with the magic of another era.
That era is Japan's medieval past, the Sengoku- Jidai, typically referred to as the "Warring States" era of Japan's Muromachi period (approximately 1467-1568 CE). During this time, rival warlords fought over territories with their private armies and built fortified castles to protect their conquests. Inuyasha takes place against this backdrop, and warlords and their armies frequently appear in its pages, often as the hapless victims of demonic attacks.
When Kagome arrives in the past, she's hailed by the local people as the reincarnation of their village's long-deceased priestess, Kikyo, who "killed" the demon Inu-Yasha by a mystical arrow before she died. This claim would seem to be the truth, as not only is Kagome the very image of the dead woman, but when she is wounded by an attacking centipede-demon, a glittering jewel emerges from the wound. This is the Shikon no Tama, or the "Jewel of Four Souls," which Kikyo died to protect. Kagome also proves to have special powers, including the ability to see magical objects. She may have even more powers, but Takahashi is content to reveal them gradually as the story unfolds.
The search for the Shikon no Tama becomes the center of Inuyasha's story when the jewel is shattered into multiple shards during an early battle. From that point, Inuyasha and Kagome have the unenviable task of tracking down all the shards, and piecing them back together again, and the story takes the form of a quest, with each episode introducing a new menace that has acquired a jewel shard.
As their travels continue, new companions join in the journey-Myoga, Inu-Yasha's flea-demon servant; Shippo, a fox-demon; and Miroku, a Buddhist monk. Each additional character subtly alters the situation, bringing out new aspects to InuYasha and Kagome's relationship.
On Kagome's 15th birthday she is dragged, by a centipede demon, into the demon dwelling history of Japan itself (Sengoku Jidai – Warring era) and, much to her horror, it seems she has inherited a great power and spiritual duties from the guardian priestess of a nearby village. The main duty being to guard a magical stone: Shikon no Tama (Jewel of four souls) that, while useless to most humans, is a powerful relic and if swallowed by demons they inject the power of the jewel as there own and grow 10x as stronger than normal. Her second meeting with a demon in this time is a hanyou (half human, half demon) the same youkai (demon) who was brought down by the original priestess, and bound to a tree known as Goshinboku tree (God-tree). Kagome's first instinct was to inspect this rather unique human boy. He looked like a human but dog-ears replaced that of normal human ears. Through circumstance and misadventure Kagome comes to awaken the demon Inuyasha. She also has somewhat of an interestingly amusing submission spell over this Inu-youkai (dog-demon) by using one single word (Oswuari – Sit) the irate and bad-mouthed boy is slammed to the ground paralysed for a few seconds. If being hunted down by a scary looking centipede youkai and an angry looking hanyou things are even worse, during a later conflict the Shikon no Tama (Jewel of four souls) is shattered and the pieces spread throughout Japan. Since each piece is capable of greatly amplifying the power of evil the fragments must be recovered. A task that will take both her powers and Inuyasha's strength to achieve. We soon learn that Inuyasha wants the stone for himself, and Kagome is indeed the reincarnation of the miko priestess who once protected the Shikon no Tama. (Who also happened to be Inuyasha's ex love interest) Inuyasha wishes to become a full-blooded demon or a taiyoukai (great demon) much like his father who is a legend among all demons. He searched for the jewel 50 years before Kagome came from the well, where he met the original priestess, Kikyou. Inuyasha soon forgot his obsession with the jewel as time passed, falling in love with the miko. Kikyou was a pure, selfless priestess, and could never hurt Inuyasha; she too fell in love with him. Things took a bad turn for both Inuyasha and Kikyou, when they were caught in an evil plan of betrayal by a demon called Naraku (hell). This demon wanted the Shikon no Tama and Kikyou and was jealous of her and Inuyasha's relationship. Lets just say there was a whole lota misunderstandings between the both and Kikyou ended up sealing Inuyasha to the tree for 50 years before dying from fatal wounds. Both of them died, in a sense, with hatred for one another...
Based upon the famous Chinese classic (monster-ghost) novel "Sai You Ki", "Xi You Ji" (in Japanese and Chinese respectively), or "West Travelling Legend" when translated. Takahashi-san has already made this point known in most interviews regarding "Inuyasha" .