The aim of the present work is to develop an osmotolerant yeast strain with high lactose utilization and further use it to ferment lactose rich whey permeate for high ethanol titer and to reduce energy consumption. Ethanol production and growth rate of selected MTCC 1389 strain were quite high in whey containing lactose up to 150 g/L but it remains constant in lactose concentration (200 g/L) as cells encountered osmotic stress. Thus, strain MTCC 1389 was used for an adaptation to lactose concentration 200 g/L for 65 days and used further for fermentation of lactose rich whey. Fermentation with an adapted K. marxianus MTCC 1389 strain in laboratory fermenter resulted in ethanol titer of 79.33 g/L which is nearly 17.5% higher than the parental strain (66.75 g/L). Expression analysis of GPD1, TPSland TPS2 found upregulated in lactose adapted K. marxianus strain as compared to the parental strain. These results suggest that an adapted K. marxianus strain accumulates glycerol and trehalose in response to lactose stress and improve osmotolerance in K. marxianus cells. Thus, the study illustrates that evolutionary engineering is an efficient strategy to obtain a superior biofuel yeast strain, which efficiently ferments four-fold concentrated cheese whey.