Sun Moon Lake lies in the center of the Shuishalian Area, which is a part of Yuchi Township in Nantou County. Situated in the western foothills of Taiwan's Central Mountain Range, between the Western Plain and the mountains, it lies at the center of Nantou County, at a longitude of 120°55 East and a latitude of 23°52 North, connecting Puli Township in the north to Renai Township in the northeast, Xinyi Township in the southeast, and Shuili Township in the southwest and Guoxing Township in the northwest.
Because of the folding landscape and faulting and eroding effects on the neighboring areas of Sun Moon Lake, this area boasts many mountains and hills. Within this area, there are 13 different-sized basins, steep slopes, and collapsed areas. The basins belong to the Puli Basin Group, a major basin-distribution area, and of these, the Yuchi Basin has the largest surface area (21 square kilometers). Sun Moon Lake (5.4 square kilometers) is the only basin that stores water. The mountains around the Yuchi Basin, including Guokeng Mountain (1,331 meters), Dajian Mountain (2,016 meters), and Shuishe Mountain (2,120 meters), which belong to the Puli Slate Mountain Region at the converging area of the Nangang River (a fork of the Wu River). The Toushe Basin (1.6 square kilometers) and Chonggui Basin (0.7 square kilometers) are the drainage basins of Zhuoshui River.
Originally, Sun Moon Lake, Toushe, Yuchi, and Puli were all lakes, but because this region is a sunken fault region of clay slate strata, due to changes in the earth's crust involving folding and sinking, different-sized basins were formed. Those newly formed basins stored water and became lakes again. After a period of time, those lakes dried, and became fertile basins and plains. As for Sun Moon Lake, it is at a higher elevation, experiencing less erosion from rivers. No external grit comes in and the quantity of water flowing in is larger than the quantity flowing out, so it retains its lake waters.