Sediment microbial fuel cells (SMFCs) are bio-electrochemical devices generating electricity from redox gradients occurring across the sediment–water interface. Sediment microbial carbon-capture cell (SMCC), a modified SMFC, uses algae grown in the overlying water of sediment and is considered as a promising system for power generation along with algal cultivation. In this study, the performance of SMCC and SMFC was evaluated in terms of power generation, dissolved oxygen variations, sediment organic matter removal and algal growth. SMCC gave a maximum power density of 22.19 mW/m2, which was 3.65 times higher than the SMFC operated under similar conditions. Sediment organic matter removal efficiencies of 77.6 ± 2.1% and 61.0 ± 1.3% were obtained in SMCC and SMFC, respectively. With presence of algae at the cathode, a maximum chemical oxygen demand and total nitrogen removal efficiencies of 63.3 ± 2.3% (8th day) and 81.6 ± 1.2% (10th day), respectively, were observed. The system appears to be favorable from a resources utilization perspective as it does not depend on external aeration or membranes and utilizes algae and organic matter present in sediment for power generation. Thus, SMCC has proven its applicability for installation in an existing oxidation pond for sediment remediation, algae growth, carbon conversion and power generation, simultaneously.