The invention discloses a rotary encoder. A first conductive membrane (11), a second conductive membrane (12), and a third conductive membrane (13) are formed on an upper surface of an insulation substrate (16). In the first conductive membrane (11), a plurality of protruding parts (11a) are formed in a peripheral direction of the first conductive membrane (11) at a certain interval and are protruded outwardly towards a radial direction. In the second conductive membrane (12), a plurality of protruding parts (12a) are formed in a peripheral direction of the first conductive membrane (11) at a certain interval and are protruded inwardly towards the radial direction. A first insulation coating film (14) is formed among the protruding parts (11a) on the first conductive membrane (11). A second insulation coating film (15) is formed among the protruding parts (12a) on the second conductive membrane (12). Because that the insulation coating films having a certain thickness are arranged among the conductive membranes, the insulation coating films can be arranged among the conductive membranes, so that a step formed by thickness differences among the conductive membranes can be filled up. The invention also discloses a manufacturing method of the rotary encoder. The rotary encoder is reduced in output noise and is improved in performances.