This paper presents a thyristor controlled LC (TCLC) compensator for dynamic reactive power compensation in a smart grid system. Compared with the traditional static var compensators like a fixed capacitor-thyristor controlled reactor (FC-TCR) which generates low order harmonic currents, the proposed TCLC can significantly mitigate the injection of harmonic currents. In this paper, the design of the TCLC parameters is investigated with the considerations of its reactive power compensation range and harmonic currents rejection. And a control method based on the generalized instantaneous reactive power theory is proposed. Moreover, representative simulation and experimental results of the proposed three-phase three-wire TCLC are presented to show its effectiveness in dynamic reactive power compensation in comparison with the traditional FC-TCR and parallel combination of FC-TCR and passive power filter.