The needs for new sources of energy is limitless, and at the same time wastage of the electrical energy due to the lagging power factor in the inductive loads are never realized. Hence, there is an urgent need to avoid this wastage of energy. The power factor basically shows how much of the supplied energy is used. The maximum value of power factor is unity. Thus, the closer the power factor value is unity, the higher the energy efficiency or the lower the losses. In electrical terms, power factor is basically defined as the ratio of active power to reactive power, or as the phase difference between voltage and current. Active power does useful work, while reactive power does not do useful work, but is used to create the magnetic field required by the device resulting in loss of power. Here it presents a prototype for automatic power factor correction using the 8-bit (Advanced Virtual RISC) AVR microcontroller “Atmega328” and where RISC stands for Reduced Instruction Set Computer. Power factor correction with capacitor banks reduces reactive power consumption, which minimizes losses and at the same time increases the efficiency of the electrical system. Power saving issues and reactive power management have lead to the development of single-phase capacitor banks for domestic applications. The development of this project is to improve and modernize the operation of single-phase capacitor banks by developing a control system based on a microcontroller. The control unit will be able to control the individual capacitors in the capacitor bank and will operate in stages depending on the change in power factor. A current transformer and a voltage transformer are used to measure the current and voltage in a circuit to determine the power factor. The intelligence of this microcontroller system ensures consistent use of capacitor steps, minimizing switching functions and improving power factor correction.