Five different fungi isolated from distillery mill site in which two isolates (DF3 and DF4) had higher capabilities to remove color were identified as Emericella nidulans var. lata and Neurospora intermedia, respectively. Optimization of process parameter for decolorization was initially performed to select growth factors which were further substantiated by Taguchi approach in which seven factors, %carbon, %nitrogen, duration, pH, temperature, stirring and inoculum size, at two levels applying L-8 orthogonal array were taken for both fungi. Maximum color was removed at pH 3, temperature 30°C, stirring 125 rpm, dextrose (0.05%) and sodium nitrate (0.025%) by both fungi. After optimization, there was two-fold increase in color removal from 38 to 62% (DF3) and 31 to 64% (DF4) indicating significance of Taguchi approach in decolorization of distillery mill effluent. The mechanism for decolorization was determined by enzyme analysis, laccase and glucose oxidase, and indicated significant activity in DF3 as compared to DF4.