This paper presents a novel phase-shift arctangent (PSA) interpolation method to improve the measurement accuracy of a planar capacitive incremental displacement sensor. Signals of planar capacitive micro-sensors acquire waveform errors, including sensitivity differences and phase-shift errors, because of static errors and dynamic disturbances. In the proposed PSA scheme, such errors are removed completely by loading a particular arctangent function. Moreover, measuring efficiency of the proposed planar capacitive sensors is improved by combining coarse measurement and fine estimation. Experiments show unanimous results to model-based fitting. When electrode length is four times the gap distance, applying the PSA interpolation method decreases waveform errors from more than 4 % to 1.72 %.