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Carbon encapsulated iron oxide nanoparticles (CEIO-NPs) prepared by carbon arc method were successfully applied for in vitro magnetic hyperthermia. The CEIO-NPs were chemically oxidized and surface modified with PEG–FA for selective tumor localization in cancer cells that over expresses the folate receptors (FR+). The size, morphology, heating efficiency, biocompatibility and in vitro cell uptake of CEIO–PEG–FA NPs are extensively characterized. The as-prepared nanoparticles have generated quick heating (43–45 °C) upon exposure to an alternating magnetic field (AMF) with the saturation magnetization of 25 emu/g. The LDH cytotoxic assay demonstrated that the nanoparticle did not affect the viability of normal human fibroblast. The quantitative and cellular uptake studies by TEM confirmed the selective and increased uptake of CEIO–PEG–FA NPs when compared to the CEIO-nanoparticles. In conclusion, CEIO–PEG–FA NPs have the potential to induce magnetic hyperthermia in FR+ cells via the receptor mediated endocytosis uptake mechanism.