Gradual increase in concentration of carbon dioxide (CO₂) in the atmosphere due to the various anthropogenic interventions leading to significant alteration in the global carbon cycle has been a subject of worldwide attention and matter of potential research over the last few decades. In these alarming scenario microalgae seems to be an attractive medium for capturing the excess CO₂present in the atmosphere generated from different sources such as power plants, automobiles, volcanic eruption, decomposition of organic matters and forest fires. This captured CO₂through microalgae could be used as potential carbon source to produce lipids for the generation of biofuel for replacing petroleum-derived transport fuel without affecting the supply of food and crops. This comprehensive review strives to provide a systematic account of recent developments in the field of biological carbon capture through microalgae for its utilization towards the generation of biodiesel highlighting the significance of certain key parameters such as selection of efficient strain, microalgal metabolism, cultivation systems (open and closed) and biomass production along with the national and international biodiesel specifications and properties. The potential use of photobioreactors for biodiesel production under the influence of various factors viz., light intensity, pH, time, temperature, CO₂concentration and flow rate has been discussed. The review also provides an economic overview and future outlook on biodiesel production from microalgae.