The invention discloses a traditional Chinese medicine composition for calming nerves, tranquilizing, clearing dryness-heat and alleviating mental illness and a preparation method thereof. The composition is prepared from the following components: whole grass of Cardamine hirsuta L., whole grass of Dregea yunnanensis (Tsiang) Tsiang et P. T. Li, root of Serissa serissoides, whole grass of Rhodobryum giganteum (Schwaegr.) Par., whole grass of Plagiopus oederi (Brid.) Limpr., radix asparagi, spire of henon bamboo, seed of Diospyros lotus, whole grass of Goodyera schlechtendaliana Rchb. F., rhizome of Panicum repens L., pine root wrapped by fushen, Melitodes ochracea(Linnaeus), whole grass of Filifoliumsibiricum(L.)Kitam., hoopoe micropowder, cornu gorais micropowder, lotus micropowder, borneol micropowder, a common andrographis herb extract and a bengal waterdropwort herb extract. The traditional Chinese medicine composition for calming nerves, tranquilizing, clearing heat and alleviating mental illness is formed by reasonably selecting traditional Chinese medicines and elaborately preparing by using a traditional Chinese medicine dialectic method and combining with clinical experience, has the effects of nourishing the brain and calming nerves, softening liver for calming endogenous wind, tranquilizing and clearing dryness-heat, clearing heat-fire and relieving the pressure, can effectively alleviate various symptoms of mental illness, realizes conditioning from inside to outside, can adjust visceral malfunctions and disordered meridian functions, improves the mental stress capacity of a patient, and is remarkable in effect, mild in medicine effect, high in safety and free of side effect.