Habitat features, such as species diversity, functional diversity, tree size, disturbances and fragment sizes have differential impacts on carbon (C) storage and C-sequestration in forest ecosystems. Present study attempted to understand the tree strategies for modulating C-sequestration capacity across tropical dry forest fragments with variable edge distances. We evaluated the differences between drought strategies (i.e., drought avoiding and drought tolerant) for variations in stem density, relative growth rate (RGR), C-storage and C-sequestration, species diversity, functional diversity, tree size and disturbance indicators along edge distance gradient, besides analyzed the differences between drought strategies for responses of C-storage and C-sequestration to variations in species diversity, functional diversity, tree size and disturbance indicators. Various traits and functional indices were analyzed using standard statistical techniques. For total trees and for the two drought strategies, generalized linear modeling results showed a significant decline in stem density, RGR, C-stock, C-sequestration, species diversity, functional diversity and tree size indicators, while a considerable increase in disturbance indicators, along decreasing edge distance across the fragments. The drought strategies exhibited a high degree of variation in the slope of associations for above variables with edge distance across fragments. For predicting C-sequestration, structural equation modeling results showed highly significant influence of functional diversity indicators for drought avoiding strategy, while species diversity indicators were strongly significant for drought tolerant strategy. Moreover, fire index and drought index were critical predictors for C-sequestration for drought avoiding and drought tolerant strategies, respectively. This study provide inputs to understand the largely ignored processes of C-storage and C-sequestration in fragmented forests, which are currently prevalent due to heavy anthropogenic pressures. Our findings are useful for forest managers to understand vegetation responses to interactions of species diversity, functional diversity, tree size and disturbance indicators, for predicting the stability of larger fragments and for planning restoration of smaller fragments.