Municipal wastewater (WW), if not properly remediated, poses a threat to the environment and human health by carrying significant loads of nutrients and pathogens. These contaminants pollute rivers, lakes, and natural reservoirs where they cause eutrophication and pathogen-mediated diseases. However, the high nutrient content of WW makes it an ideal environment for remediation with microalgae that require high nutrient concentrations for growth and are not susceptible to toxins and pathogens. Given that an appropriate algal strain is used for remediation, the incurred biomass can be refined for the production of biofuel. Four microalgal species (Chlamydomonas reinhardtii, Chlorella sp., Parachlorella kessleri-I, and Nannochloropsis gaditana) were screened for efficient phycoremediation of municipal WW and potential use for biodiesel production. Among the four strains tested, P. kessleri-I showed the highest growth rate and biomass production in 100% WW. It efficiently removed all major nutrients with a removal rate of up to 98% for phosphate after 10 days of growth in 100% municipal WW collected from Delhi. The growth of P. kessleri-I in WW resulted in a 50% increase of biomass and a 115% increase of lipid yield in comparison to growth in control media. The Fatty acid methyl ester (FAME), and fuel properties of lipids isolated from cells grown in WW complied with international standards. The present study provides evidence that the green alga P. kessleri-I effectively remediates municipal WW and can be used to produce biodiesel.