The simulation study of PI Controlled, three phase shunt active power filter to improve power quality by compensating harmonics and reactive power required by a non-linear load is presented. The shunt active filter employs a simple method for the reference compensation current based on Fast Fourier Transform. Classic filters may not have satisfactory performance in fast varying conditions. But auto tuned active power filters give better results for harmonics minimization, reactive power compensation and power factor improvement. This project has proposed an auto tuned shunt active filter, which maintains the THD well within the IEEE-519 standards. Hysteresis current control method is preferred here because of its merits. Since, the conventional Hysteresis Controller have some problems, we have improved its performance calling Modified Hysteresis Current Controller. The results are found to be quite satisfactory to mitigate harmonic distortion, reactive power compensation and power factor improvement.