MCrAlY coatings prepared by thermal spraying have been commonly utilized as thermal protective coatings for crucial hot-section components due to their excellent high-temperature oxidation resistance and superior mechanical properties in harsh environments. However, the oxides introduced during spraying process have an adverse impact on the performance of the MCrAlY coatings. In the present work, an attempt was made to deposit NiCrAlY coatings by air plasma spraying (APS) with a low oxide content achieved by introducing diamond into NiCrAlY powders through ball milling as a carbon deoxidation element. During spraying, the carbon is preferentially oxidized and the formed gaseous CO is completely removed rapidly. Thus, the in-flight oxidation of main metal elements can be suppressed. Individual droplets in-flight were collected using liquid N2 to elucidate the deoxidation effect. The coatings were deposited at different spray distances to examine the oxidation behavior. Results showed that the oxide content of NiCrAlYC particles is 0.43 wt.%, being much lower than the 2.87 wt.% of conventional NiCrAlY particles. The oxygen content of APS NiCrAlY coatings presented a decreasing tendency with increasing spray distance. All results reveal that the NiCrAlYC droplets without oxidation of Ni, Cr and Al can be achieved by adding 4 wt.% deoxidation element carbon. The low oxide inclusions contributed to the formation of dense NiCrAlYC coatings with a porosity of about 0.3% and the significantly improved inter-lamellar cohesion and the adhesion between the coating and the substrate. The tensile tests reveal that the APS NiCrAlYC coatings achieved an adhesive strength higher than 71 MPa. Thus, it is an effective approach to deposit NiCrAlY coatings with excellent performance by APS through design of NiCrAl-based powders containing carbon as a deoxidizer.