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Active power filters (APFs) are used to compensate harmonics, reactive current and negative sequence fundamental frequency current of load current drawn by nonlinear loads. The flexibility of selective compensation, if provided in the control scheme, makes APF versatile device for compensation of reactive power, harmonic currents and unbalance in source currents and their combinations, depending upon the limited rating of the voltage-source inverter employed as an APF. The proposed scheme decomposes the load current into positive and negative sequence fundamental frequency active components, reactive component and harmonic components in synchronous reference frames. The control scheme performs with priority-based scheme, which respects the limited rating of the APF. The simulated results in MATLAB environment and experimental results of the developed prototype of APF are presented to validate the effectiveness of the proposed control scheme. Digital signal processor based implementation of control scheme is also detailed for selective compensation of power-quality problems with details of developed prototype.