Hi saurabh,
Custom object is a record table and Custom setting is a configurations table. Custom object is like any Database table that we used to have in SQL or in any other database. CustomSetting is like configuration file that we used to have. Even though List type of custom setting looks like that it is also a custom object but there are differences. LIke in custom settings there is a limit on no of records, you can not write trigger, workflow etc on custom setting.
I hope this will help you.
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Thanks.