SummaryThis paper develops a variable step size robust normalized least mean absolute third (VSSRNLMAT)‐based control scheme for a three‐phase grid‐tied multifunctional photovoltaic system (GTMPVS). The GTMPVS delivers PV power to grid‐connected loads and feeds excess power to the grid through a voltage source converter (VSC) when PV power is available. It enhances power quality (PQ) by mitigating current harmonics and compensating for an unbalanced load and reactive power simultaneously. The proposed control scheme accurately extracts the fundamental active and reactive weight components of nonlinear load current. The power exchange at the grid side occurs with balanced and sinusoidal grid currents. During the absence of PV power, the VSC continues its operation as a distribution static compensator (DSTATCOM), thus increasing the effective utilization of the power electronic switches employed in the VSC. The GTMPVS model is created in MATLAB/Simulink. The response of GTMPVS is observed under steady‐state and dynamic operating conditions while feeding power to a nonlinear load. The dynamic operating conditions are created by a change in solar irradiation and an unbalanced nonlinear load. Further, the proposed VSSRNLMAT control scheme is compared with some of the other adaptive filtering‐based control schemes, including least mean square (LMS), least mean fourth (LMF), least mean absolute third (LMAT), and normalized LMAT (NLMAT) in terms of convergence, oscillations, mean square deviation (MSD), computational complexity, and grid current total harmonic distortion (THD). It is found that the VSSRNLMAT control scheme offers THD of grid current as per IEEE‐519 standard. The proposed control scheme is implemented to operate the laboratory‐developed GTMPVS to verify the simulation results.