Different functionally graded 20 wt.% MgO-ZrO2yNiCrAl thermal barrier coatings were obtained through the plasma spraying process. The microstructures, chemical compositions and fractured surface were examined by means of electron probe microscopic analysis (EPMA), scanning electron microscopy (SEM) and transmission electron microscopy (TEM). The SEM and EPMA results showed that: (1) microstructures and compositions varied gradually in the coatings; (2) the elements Cr and Al were enriched along the sprayed lamellae boundaries and leaded to the formation of oxides. TEM observation enabled finding the formation of dense dislocations and deformation twins, and also the formation of the oxides Al2O3 and Cr2O3 between grain boundaries. The SEM observations of the fractured surface revealed that the intermediate graded layer had the compositive mechanical properties in strength and toughness, due to the microstructure improvement and relaxation of residual stress concentration.