InuYasha's father defeated a powerful Chinese moth yokai named "Hyoga" two centuries ago, but a Shikon Jewel fragment has freed his son, "Menomaru", who seeks revenge for his father's destruction and to free the tremendously infinite power and strength of his father sealed away with him. Men?maru and his female minions, "Ruri" and "Hari", begin battling with InuYasha. Miroku and Sango have their hands full dealing with the duo, Ruri having copied Miroku's Wind Tunnel and Hari having stolen and possessed Sango's faithful companion, Kirara. Men?maru curses Kagome so she turns against InuYasha.

When Men?maru is finally able to access the tremendous demonic power of his predecessors, sealed away by InuYasha's father, he becomes the new Hy?ga and exponentially much, stronger and more powerful as each generation gains the power of all of the preceding generations. Hy?ga soon begins to change the essence of time and space as he absorbs the souls of countless people in order to fully merge himself with his family's demonic energy that causes the mind-control that he put on Kagome to awaken and an injured Kaede and search for InuYasha. As he's crossing a bridge, InuYasha thinks he sees Kikyo but instead it's Kagome who is wearing Kikyo's clothes. InuYasha greets her on the bridge while Kagome is trying to tell him to run, but unfortunately cannot be heard. Then walks over to InuYasha and puts her head on his shoulder. He embraces her after which Kagome says "InuYasha... get away.", warning him of her attack. He looks in amazement but is then stabbed by magical "claws" that come from Kagome's hands; afterwards, he realizes what Men?maru has done. He then is chased by the controlled Kagome to the tree that he was sealed to. Regaining control of herself for a moment, Kagome tells InuYasha to run.

After returning to her own time, Kagome walks out to a snowy Tokyo. When she is walking towards the tree that InuYasha was sealed to and where he sits now, she sees him there, knocked out due to her shooting with an arrow while she was controlled by Menomaru. As she walks towards him, a snow flake floats by and erases the image. It is then that she realizes that without a way back to Feudal Japan, that she can never see InuYasha again and that she collapses and begins to cry. Once she gets back up, she heads over to the tree and places her hand on it. InuYasha and Kagome are then emotionally connected to each other through the tree and begin to talk through thoughts, as their romantic love feelings and affections towards each other proves to be quite strong and genuine. He asks where she is, Kagome tells him that she is in her own time. Before running back to the Bone Eaters Well, her mother gives Kagome her school uniform. After putting it on, Kagome shoots the arrow into the well just as a reawakened InuYasha is about to slash the roots away. The blast from the arrow causes InuYasha to get burnt and fall back into rubble. She emerges from the well. Myoga tells them that they have to defeat Menomaru before it's too late.

Sesshomaru appears realizing that his father's ancient enemy is fighting with his half brother, but chooses not to interfere. For the first time in the series he converses with Kikyo who somehow knew he was InuYasha's older brother and Sesshomaru knew about her genuinely strong and close romantic relationship with InuYasha as he told Jaken and Rin that she was nothing, but a dead priestess returned to life. He leaves warning her that only he will kill InuYasha. Miroku and Sango manage to defeat Ruri and Hari and joins InuYasha, Kagome and Shippo in a stand against Menomaru. However, he emerges from his cocoon as the new Lord Hyoga, a moth god with far more power than his father ever had. But Kagome's sacred arrow destroyed his power's font and InuYasha's Backlash Wave (Bakury?ha) killed him. After the credits, InuYasha and Kagome are sitting together in modern Tokyo by the Tree.

After defeating Naraku, they subsequently split up, leaving InuYasha, Kagome and Shippo searching for the remainder of the Shikon Jewel shards without Miroku or Sango. Kagura and Kanna, the two surviving incarnations of Naraku are restless now that Naraku is dead. They find a mirror in a shrine and awaken Kaguya, Princess of the Heavens. In exchange for freeing her, Kaguya promises to grant Kagura her eternal freedom. The two set out to recover five items that will free Kaguya from her mirror, leading them to cross paths once again with InuYasha and his friends. Kaguya, desiring to stop time, kidnaps Kagome who is able to put up a barrier against her spells. The remainder of the group reunite in Kaguya's realm of mirrors in order to retrieve Kagome. Kaguya, intending to enslave InuYasha, attempts to transform him in to a full-fledged demon. The spell is broken by Kagome, who admits her love for InuYasha for the first time in order to stop the transformation. Naraku reappears on Kohaku's back, revealing that he had purposely faked his death to absorb Kaguya. Naraku, unable to fight on equal terms, then escapes with Kohaku, Kagura and Kanna. Kagome then combines her power with that of Miroku as she launches a piece of his staff in the form of an arrow and destroys Kaguya's mirror. InuYasha then destroys Kaguya's physical form. Kaguya appears in a gas-like form and tries to take control of Kagome's body but ends up being sucked into Miroku's wind tunnel. They escape back to the normal world through Kaguya's mirror as her palace collapses. With things returned to normal, an embarrassed InuYasha and Kagome resume denying their feelings for each other, refusing to discuss Kagome's confession in the mirror realm.

In the event of Inuyasha's birth, the suitor Takemaru kills Lady Izayoi, just before Inuyasha's father arrives. Still injured from his battle with Ryukotsusei, he resurrects Izayoi with the Tenseiga, telling her to escape with their son, whom he names Inuyasha, and gives her the Cloth of the Fire Rat to protect them from the burning and collapsing palace, where Inuyasha's father died facing Takemaru with his third sword.

In the present era, Kagome's grandfather comes by with a sword which he calls a "national treasure"; as Grandpa is about to put it in the storehouse for "safe keeping", Kagome's younger brother goes over to the sword and it speaks or more accurately, the spirit of the sheath, Saya. With his seven hundred-year spell on the sword So'unga failing, Saya seeks out Inuyasha, hoping he has the willpower to control the sword. Unfortunately, he was mistaken, as it tried to possess Inuyasha, but he tried his best to resist being controlled and finally brings the sword back to the past, but in the process unleashes the deadly Dragon Twister on an evacuated village, a technique far more powerful than either the Tetsuseiga's Backlash Wave or the Tenseiga's Dragon Strike. Sesshomaru is alerted to the return of So'unga and follows the scent to find that InuYasha is possessed by the sword. The two of them duel and at a crucial moment, Kagome, having returned with Saya, saves the day and forces the So'unga to release Inuyasha from its grasp. As Inuyasha and Sesshomaru depart their respective companies to seek out So'unga, Myoga, Totosai and Saya explain to everyone that in the aftermath of Inuyasha's father's death two hundred years ago, they carried out his last command for his three swords. While the Tetsuseiga and Tenseiga were taken care of, Saya claimed that there were no instructions for how to dispose of So'unga. Unable to give it to either Inuyasha or Sesshomaru, Saya decides to keep So'unga asleep for at least seven hundred years and had it thrown into the Bone Eater's Well, where it ended up in the possession of Kagome's family.

Meanwhile, So'unga finds a new demon host, recovers Sesshomaru's lost left arm from the netherworld, and revives Takemaru, playing on his hatred for the Dog General and his sons. Takemaru slaughters an entire castle and resurrects the living dead to wear down his enemies' strength. During the battle, the demon kidnaps Kagome and Rin. Both of the brothers take off to protect the girls, whom So'unga urges Takemaru to kill to enrage their foes. However, Inuyasha manages to overcome Takemaru, crediting his desire to protect Kagome as his strength. Takemaru then realizes that Inuyasha's mother wanted him to live and that he loved her. His flesh then erodes to nothing but bones. After Sesshomaru uses the Tenseiga to prevent demonic imps from resurrecting Takemaru, So'unga creates itself a new body and opens a gateway to the netherworld, threatening to end all life on Earth. While Saya protects the humans from being overcome by the dead souls from the netherworld, Inuyasha and Sesshomaru do battle with So'unga, both determined to defeat the sword on their own. Individually, So'unga was stronger than either the Tenseiga or Tetsuseiga. However, Inuyasha and Sesshomaru combine their attacks to overwhelm So'unga's Dragon Twister, causing the sword and Sesshomaru's left arm to fall into the pit of hell. The two brothers then sees their father who thanks them and say goodbye.

After the credits while laying on a hill, Kagome tells Inuyasha that she realize Sesshomaru likes humans, and Inuyasha replies that he did not care at all. Kagome remembers the enchanted beads and tells InuYasha to sit up, close his eyes and ask him that she had a nice surprise for him. Kagome then places it around his neck. Inuyasha tries to get it off, but Kagome says "Sit, boy", causing him along with it to fall on the ground.

At Horai Island, six half-demon children, Asagi, Dai, Roku, Moegi, Shion and Ai watch a Kikyo look-alike develop in a green orb, then stand in front of the Cauldron of Resonance while it comes to life. Four scars, the mark of the Four War Gods (Ryuura, Juura, Kyoura and Gora), appear on all of the children's backs, except Ai. Asagi tells Ai to leave the island while she does not have the mark. After Ai leaves, The Four War Gods find out and try to retrieve her, but InuYasha and the others defeat Gora and save Ai, who asks them on Horai Island. Later, InuYasha explains the myth Horai Island, which appears once every and recalls fifty years ago, when he and Kikyo went there to meet the half-demon children, the Four War Gods attacked them. Gora sucked some of Kikyo's blood and creates her doppelganger, and Ryuura marked InuYasha's back with the scar, saying that he would never be free from them with the scar on him. The gang decides to head to Horai Island to investigate.

The villagers panic upon seeing the island. In a small hut, Kikyo listens to a man's tale of Horai Island and leaves, saying she would defeat the demons. The rest of the villagers rush to the shrine and start praying for divine protection; Kyora appears and proceeds to burn down the shrine and kill many of the villagers. Sesshomaru arrives and drives him off. After the battle, he remembers back to his first encounter with Kyora, when he was marked by the scar; he has a personal vendetta. As InuYasha and company near the island, Jura appears and fires his Thunder Cannon at them, destroying their boat. Miroku and Sango fly away on Kirara, pursued by Jura, while InuYasha, Kagome and Ai escape to the beach, where they meet Ryura. In the ensuing fight, Ryura nearly kills InuYasha, but Kagome stops him by firing a sacred arrow. Ryura is forced to retreat when he sees his hands faded out of existence, but not before he hurls some insults at InuYasha. Ai leads the group to the village, where they find Asagi singing together with the other four children. When InuYasha reveals his plan to confront the Four War Gods, Asagi begs him to reconsider, saying they will all be killed. The gang learns that Asagi is going to sacrifice herself to the Cauldron of Resonance, and she argues her death will allow the others to live a little longer. They all follow Asagi to the Cauldron, where InuYasha attempts to destroy it with failure. Suddenly, he and Asagi are pulled inside as it closes. Outside, the rest of the gang and the children try to open the doors, while on the inside, InuYasha feels his strength waning. Lady Kanade, the priestess who fought the Four War Gods fifty years ago, appears and lends her strength to InuYasha, along with the War Gods' power spheres in a box, telling him it must be destroyed as soon as possible and never opened. In return, she asks InuYasha to save the children, then gives her blessing to Asagi before she disappears. InuYasha destroys the door of the Cauldron with Adamant Barrage, accidentally breaking Kagome's bow in the process.

The Kikyo look-alike appears and takes the power spheres from InuYasha who chases her to the War Gods, where she opens the box, releasing the spheres to their owners. While Kagome, Shippo and the children attempt to make a raft to escape, the Kikyo doppelganger attacks InuYasha. At the Cauldron, Sesshomaru appears and finds Kyora waiting for him. Sesshomaru easily defeats him with another Dragon Strike. Meanwhile, Miroku and Sango fly on Kirara to confront Jura and the resurrected Gora. Using his Wind Tunnel, Miroku redirects Gora's blasts so that it hits Jura and Sango finishes him off with Hiraikotsu. Meanwhile, InuYasha battles with the fake Kikyo and is about to lose when the true Kikyo appears and defeats the impostor, then leaves her bow behind. InuYasha finds Ryura attacking Kagome and the children, and he kills him with his Wind Scar. With only Gora remaining, Miroku spears Gora's head with his staff, greatly weakening it. With InuYasha's Backlash Wave, he kills the last War God. However, all the power spheres combine to create the true War God. Although a combination of Kagome's sacred arrow and InuYasha's Backlash Wave can destroy it, she cannot fight because her bow was broken. The fireflies, spirits of the previously sacrificed island residents, lead the children to Kikyo's bow and they bring it to Kagome. Finally, Kagome's arrow purifies the War Gods' attack and, with the fireflies' blessing, InuYasha unleashes his Backlash Wave with his Adamant Barrage, killing the fireflies and the War God. As the gang and the children leave the island, it vanishes into the broken time line.

During the credits, it is indicated that the children spend some time with Kaede's villagers, before departing to face the world by themselves.