Interstitial-free (IF) steel with ultrafine-grained (UFG) size was used to clarify the underlying mechanisms of the ‘extra-hardening’ behavior from the Hall-Petch plot and the discontinuous yielding behavior from axial tensile tests. Using transmission electron microscopy (TEM) at different tensile strains, it was found that the TEM micrographs for the bulk sample of the UFG IF steel showed a decrease in dislocation density in the grain interior after experiencing a micro tensile strain of 1.0% before macro-yielding. Additionally, an increase in dislocation density was found in the grain interior, with a micro tensile strain of 15% in the necking region after macro-yielding. In-situ compression tests in a TEM for micropillars were performed to directly observe the motion of dislocations and corresponding interactions with grain boundaries in UFG IF steel. Before macro-yielding, pre-existing dislocations in the grain interior moved toward the grain boundary, wherein they were then absorbed. The dislocation density decreased significantly due to the annihilation, which was accompanied by an increase in load during pre-yielding. The decrease in dislocation density in the grain interior of the micropillar is consistent with the results obtained from the bulk sample. After macro-yielding, the burst-like dislocation emission emerged from the grain boundary, leading to a yield drop and a discontinuous yielding behavior. Furthermore, the higher yield stress and the yield drop in the UFG IF steel can be understood by the decrease in dislocation density according to a combination of the Orowan model as well as the Johnston-Gilman model.