The nominal internal quantum efficiency of InGaN/GaN multiple quantum wells significantly increases from 5.6 to 26.8%, as a low-temperature GaN cap layer is grown in N2/H2 mixture gas. Meanwhile, the room-temperature photoluminescence (PL) peak energy shows a merely 73 meV blue shift. On the basis of temperature-dependent PL characteristics analysis, the huge improvement in PL efficiency arises mainly from the “etching effect” of hydrogen, which reduces the defect density and indium segregation at the upper well/barrier interface, and consequently contributes to the decrease in the number of nonradiative recombination centers and the enhancement of carrier localization.