AbstractYttria (8 wt%)‐stabilized hafnia (YSH) and carbon nanotubes (CNTs) (1 wt%) reinforced yttria‐stabilized hafnia (YSHC) coatings were fabricated on alumina substrate using atmospheric plasma spray technique. Raman spectra confirmed the survival of CNTs in plasma sprayed YSHC coating and indicated about graphitization of CNTs. Whereas, the FE‐SEM micrograph infers the presence of few 2‐D graphene platelet‐like structure in plasma sprayed YSHC coating. Addition of 1 wt% CNTs has significantly increased the densification of YSH coating from 86% to 92%, whereas average hardness and elastic modulus increased by ~57% and ~16%, respectively. A phenomenal increase of ~125% in relative fracture toughness was observed in YSHC coating, which is attributed to three major factors viz. (a) Enhanced densification (b) High fraction of fully melted regions and (c) Various toughening mechanisms, like CNTs pull out, CNTs braiding, graphene splat wrapping, CNTs anchoring.