The hydrolysis of lactose by enzyme β-galactosidase into glucose and galactose play an important role in biotechnology, pharmaceutical and food processing industries. The aim of present study was focused on the isolation of novel yeast strains and formulation of low-cost medium based on whey for optimal β-galactosidase activity. β-galactosidase activities of isolated strains were carried out by ONPG assay. The yeast isolate (Kluyveromyces marxianus) showed maximum enzyme activity (1710 IU g-1 DW), when grown on whey permeate at pH 5.5, temperature 30°C after incubation period of 28 h. The utilization of dairy waste (whey) was found to be economical for β-galactosidase production by using isolated yeast cells. This enzyme is also known for its trans-galactosylation reaction and synthesized lactose based derivatives including lactulose and galacto-oligosaccarides, which can be further used in probiotic foods.