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This study explores the circular potential of sewage sludge in India’s domestic liquid waste sector amid rising climate and sanitation challenges. Wastewater contributes 7–10% of national methane emissions and consumes high energy. Focusing on cities with populations of 1–5 lakh, the research identifies methane capture, biofertilizer production, and electricity generation as key pathways for circularity. Using data analysis, field visits, and stakeholder inputs, it highlights technical, economic, and policy barriers. Drawing from global practices, the study urges policy reforms, fiscal incentives, and infrastructure investment to transform sludge from waste to wealth, promoting sustainable sewage treatment and urban climate resilience.