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This study proposes an improved scheme of hysteresis current control for a three-level distribution static compensator (DSTATCOM) application. The conventional two-level hysteresis controller offers advantages including ease of implementation and good dynamic performance, but the switching frequency is subjected to wide variation. Also, the maximum frequency may exceed tolerable limits, as the width of the current band becomes narrower. The basic three-level switching scheme overcomes the above drawback and results in a reduced switching frequency and lower switching losses but the actual current tracks the reference current either in the upper band or in the lower band, resulting in an increased tracking error. However, the suggested scheme results in reduced stress and losses of the inverter switches with a limited range of switching frequency as well as a low tracking error. A digital simulation of a three-phase, four-wire compensated system is carried out through MATLAB to verify the effectiveness of the suggested scheme and an experimental prototype is also built to validate the same.