The inductively coupled plasma (ICP) etching behavior of Ba0.5Sr0.5TiO3 (BST) thin films has been characterized with Cl2/Ar gas mixtures by varying the process parameters such as chamber pressure, ICP power, and substrate bias rf power. The etching characteristics of BST were investigated in terms of etch rate, etch profile, surface residue, and electrical properties. The results obtained can be further interpreted by the plasma properties (ion flux and dc bias) in situ measured by a Langmuir probe. Quantitative analysis of the plasma-induced damage in the Pt/BST/Pt capacitor was attempted to discuss the mechanism of leakage current density and dielectric constant with various substrate bias rf power and ICP power levels. Finally, optimization of the etch parameters for fabricating BST capacitors was performed to minimize the plasma-induced damage. The optimum condition appears to be under a 30% Cl2/(Cl2+Ar) gas mixture, ICP power of 800 W, substrate bias rf power of 100 W, and chamber pressure of 0.67 Pa. Furthermore, it is found that the damage samples can be effectively recovered after annealing at 600 °C in oxygen ambient. The result can be confirmed by the x-ray diffraction data, which indicates that an improvement of BST crystalline quality after annealing occurs. This makes the leakage current density of the Pt/BST/Pt capacitor decrease to 3×10−7 A/cm2 under an applied voltage of 1.5 V, while its dielectric constant can recover from 150 to 180.