According to a legend Sarahan was once ruled Banasura, the mythological demon king. One night, Usha, his beautiful daughter, dreamt of a handsome and strong prince. She told her friend Chitralekha about the dream. Based on Usha's vivid description, Chitralekha drew his portrait and then vowed that she would search the world and bring that prince to Usha. Like a good friend Chitralekha searched high and low till she saw Aniruddha, the son of Lord Krishna. Chitralekha instantly knew that he was the prince of Usha's dream. So as Aniruddha slept, Chitralekha quietly lifted his bed and carried him to Usha. But the moment Lord Krishna heard of his son's abduction, he marched against Usha's father with his army. Poor Banasura - who had no idea about what was going on - was soundly defeated. The story of the dream then tumbled out and everything ended well. Magnanimous as ever, Lord Krishna married his son to Usha and returned Banasura's kingdom as dowry, or rather, reverse dowry.
Myths and legends apart, Sarahan was the capital of the princely state of Bushahr. The raja moved in here from Kamru in Spiti. In the 18th century the capital was shifted again, to Rampur this time. Bushahr was regarded as one of the wealthiest states in the region and was a major entrepot for trade with Tibet, Ladakh, Kashmir and Khazakistan. Even after it was capital no more, there was no decline in Sarahan's standing. The ruling family moved here during summer and it was the entry point to Kinnaur on the old Hindustan-Tibet road.