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For the purposes of forest restoration, carbon (C) fixation, and economic improvement, eucalyptus (Eucalyptus urophylla) has been widely planted in South China. The understory of eucalyptus plantations is often occupied by a dense community of the fern Dicranopteris dichotoma, which intercepts tree canopy leaf litter before it reaches the ground. To understand the effects of this interception of litterfall on C cycling in eucalyptus plantations, we quantified the mass of intercepted litter and the influences of litterfall interception on litter decomposition and soil respiration. The total mass of E. urophylla litterfall collected on the understory was similar to that collected by the traditional litter trap method. All of the eucalyptus litterfall is intercepted by the D. dichotoma canopy. Of the litterfall that was intercepted by D. dichotoma, 20–40% and 60–80% was intercepted by the top (50–100 cm) and bottom (0–50 cm) of the understory canopy, respectively. Intercepted litterfall decomposed faster at the bottom of understory canopy (at the base of the plants) than at the top, and decomposition was slower on the soil surface in the absence of understory than on any location in the understory canopy. Soil respiration was highest when both the understory and litter were present and was lowest when both the understory and litter were absent. These results indicate that litterfall interception changed carbon flow between aboveground and belowground through litter decomposition and soil respiration, which changed carbon cycling in eucalyptus plantations. The effects of the understory on litter decomposition and soil respiration should be considered in ecosystem carbon models.