In this paper, we describe a method for feature extraction and classification of characters manually isolated from scene or natural images. Characters in a scene image may be affected by low resolution, uneven illumination or occlusion. We propose a novel method to perform binarization on gray scale images by minimizing energy functional. Discrete Cosine Transform and Angular Radial Transform are used to extract the features from characters after normalization for scale and translation. We have evaluated our method on the complete test set of Chars74k dataset for English and Kannada scripts consisting of handwritten and synthesized characters, as well as characters extracted from camera captured images. We utilize only synthesized and handwritten characters from this dataset as training set. Nearest neighbour classification is used in our experiments.