“Power Quality (PQ)” is used to describe the electrical phenomenon manifested in terms of variations in current, voltage and/or frequency that produce undesirable effects in the power system. This paper presents a reduced DC-link voltage rated Unified Power Quality Conditioner (UPQC) which eliminates current and voltage harmonics in a distribution network thereby improving the quality of power. Series capacitors have been introduced in series with the coupling inductors on the shunt filter side of the UPQC. The proposed topology helps in reducing the voltage rating of DC-link capacitor without compromising on the harmonic mitigation and thus acts as a cost effective solution in the distribution side. A simulation study of the new topology has been made in a three phase three wire system and is compared with the conventional topology of UPQC. The results are presented in the paper to show the validity of the proposed scheme. State space modelling of the modified UPQC has been implemented and stability analysis is also performed to prove the robustness of the system