In order to solve the phase change caused by factors such as carrier phase delay, initial phase difference, and low-frequency environmental noise in traditional phase generation carrier(PGC) demodulation technology, as well as waveform distortion caused by phase modulation depth, a new improved demodulation algorithm based on traditional arctangent demodulation was proposed. The phase changes and modulation depth dependence caused by different factors such as carrier phase delay could be theoretically eliminated by using this algorithm, without the need of additional calculations and compensation. By using simulation software and constructing a Mach-Zehnder interferometer demodulation device, the waveform and performance indicators of the proposed improved algorithm were compared with the other two algorithms. The results show that the calculated signal-to-noise ratio of the new algorithm is as high as 71.51 dB, and the total harmonic distortion rate is as low as 0.0004501%. The improved algorithm is insensitive to phase changes and modulation depth caused by factors such as carrier phase delay, initial phase difference, and low-frequency environmental noise. This study provides a reference for improving the accuracy of phase generation carrier demodulation technology and improving system performance.