Unlike the turn-based battle mechanics used by the previous games of the series, The Legend of Sword and Fairy 7 uses a 3D third-person in a semi-open world setting and a real-time hack and slash style of action gameplay with no pauses between exploration and combats.
The game consists of multiple major locations, each being an open-world map with numerous sub-regions that the character can explore freely on foot, encountering and interacting with various NPCs, enemy mobs and treasure chests along the way.
Nearby hostile NPCs will have a target mark appear on them, allowing the player to prioritize and lock onto each individual enemy to initiate an attack at will.
In combat, the player can alternate between light and heavy strikes to trigger different combos, use ranged attacks, or charge up a special move for maximum damage.
The game has a unique "Cooking Mode", which allows the player to use obtained recipes and ingredients to create special dishes with beverages (whenever there is a kitchen or stove nearby on the map) that can provide significant healing, power-ups and buffs for the entire team.
However, Chonglou decides not to really kill Xiu Wu and uses the dropped Chunzi Sword to open a portal that allowed him to fall through to the Human Realm.
Meanwhile, in the Human Realm, a young lady-warrior named Yue Qingshu manages to outrun Xiqu, a violent, gigantic bison-like supernatural beast that has threatened the locals for years.
Shocked and confused, Qingshu decides to interrogate the exhausted mysterious man the following morning but is distracted to rescue villagers under attack by suddenly appeared feral monsters.
Suddenly the mysterious man arrives to save her and singlehandedly slays the beast (reveal to be an escapee from the Heaven Prison) in a spectacular fight.
When staging a jailbreak to rescue the laborers, the team fight off a magically animated armor puppet defending the camp, and Moqing accidentally dropped her personal sachet, revealing her identity to the commander, who happens to be her older brother.
When visiting Tianshi Sect, Qingshu notices Mengzhang's thumb ring and recognizes him as the hooded man she witnessed meeting with the Moqing's brother.
Although finding out they are actually responsible for the miners' escape, General Bai instead chooses to let Moqing leave with them after emissaries from Tianshi Sect arrive and ask for Xiu Wu.
Yo re-enters the selection trial for the spring guardian and successfully passes it with help from the group, and reveals that he had encountered animated puppets similar to the one at the miners' camp years ago, which attacked and killed his childhood friend.
The team then travel to the Demon Realm and manage to survive a fight with Chonglou, who actually is convinced by the group's plea (but stoically not admitting) and lets them pass.
Meanwhile, Moqing and Yo sneak into the Bai mansion and discover that her brothers intend to instigate a rebellion and overthrow the Imperial Government with collaboration from Aoxu and Mengzhang.
Desperate, the team seek help from Kuiyu, who deduces that the tower formation will be used to redirect and deprive the flow of Yanbo Spring, starving and triggering the impulsive demons into violating the Pact of Three Sovereigns, which prohibits any invasion into other realms.
They then confront Aoxu's avatar and manage to destroy the tower formation via a hidden spell Kuiyu previously put inside Ziqiu.
Qingshu wakes up from unconsciousness alone and finds herself greeted by the chief goddess Jiutian Xuannü, who explains that she was mortally injured by Aoxu's death blast, and Xiu Wu has sacrificed himself to revive her, reducing himself to a soulless fruit.
The freed spirits of vicious beasts enslaved by Mengzhang and Aoxu also joined Mingshu School as fairy servants, which proves extremely helpful for the sect's newly recruited disciples.
Qingshu hears that Jiutian Xuannü has also extended to Kuiyu an invitation back into Heaven, but the latter steadfastly refuses to return to the Deity Realm.
Yue Qingshu continues her training but is having trouble focusing due to her missing Xiu Wu, who remains in the fruit form without any sign of resurrection.
Jiutian Xuannü asks Ziqiu to return to the Deity Realm, but he refuses outright despite that she threatens to seal his innate magical potential.
When seeking rare herbs in the Changbai Mountain to cure her grandfather's declining health, Qingshu encounters a fairy who can help Ziqiu resist the foul miasma of the Demon Realm.
They then arrive at the Heaven Demons Kingdom, but Kuiyu refuses to help because she considers the chance of success too slim and the stake too high for a mortal like Qingshu.
He encounters a memory where Xiu Wu viewed a recorded conversation between Jiutian Xuannü and Xiyao, the previous lady-guardian of Chunzi Spring who was executed for snatching a divine fruit and secretly creating a mortal clone of herself (the female protagonist Tang Xuejian from Sword and Fairy 3).
He invites Master Yuxia (who has now replaced the deceased Mengzhang as the leader of the League of Saints) to visit and bear witness to a ceremony, where he formally passes the sect leadership to Qingshu and tells her to go ahead and pursue what her heart feels right.
The spirit of her immortalised ancestor Yue Xilou (the founder of Mingshu School) then appears and presents her with a final trial and give her blessing when she succeeds in passing it.