Nanostructured polycrystalline samples of BiFe0.98Co0.02O3 (BFCO) with various sizes were prepared using acetate precursor based modified sol–gel method. Rhombohedral phase of nanoparticles has been confirmed by X–ray diffraction (XRD) measurement. The electrical and magnetic properties of samples were investigated for different sized nanoparticles (47.25–93.30 nm). The effect of sintering temperature on the structural, microstructural and dielectric properties has been discussed in the context of crystallite size and oxygen vacancy concentration. The temperature dependent impedance study confirms that the temperature dependent relaxation process is non Debye type and dominated by the short–range movement of oxygen vacancies. The value of magnetization is found to increase with decreasing particle size. Large magnetodielectric (MD) effect has been observed for BFCO nanoparticles with size less than ∼ 62 nm. Complex impedance spectroscopy analysis has been used to ensure intrinsic MD effect.