The prelimbic cortex (PrL), enriched with oxytocin (OXT) receptors, plays a critical role in memory consolidation. However, the role of OXT in social memory consolidation within the PrL microcircuit remains poorly understood. To examine the role of OXT signaling in social memory consolidation, we used OXT biosensors and loss-of-function approaches, including tetanus toxin-mediated silencing of OXT neurons in the paraventricular nucleus (PVN), optogenetic inhibition of the PVN-PrL pathway during rapid-eye-movement (REM) sleep, and local administration of an OXT receptor antagonist in the PrL. molecular biosensors for vasoactive intestinal peptide (VIP), somatostatin, and presynaptic calcium imaging were employed to assess inhibitory signaling in the PrL microcircuit. Optogenetic activation of the PVN-PrL pathway and intranasal OXT were used to evaluate resilience to chronic sleep deprivation-induced social memory deficits. We identified that REM-sleep OXT release via the PVN to PrL pathway supports social memory consolidation. OXT signaling deficiency reduces the activity of VIP and parvalbumin (PV) neurons, thereby disrupting the inhibitory balance between somatic inhibition mediated by PV neurons and dendritic disinhibition mediated by VIP neurons in PrL microcircuits during REM sleep. Chronic sleep deprivation (SD) disrupts OXT release and inhibitory balance, leading to pyramidal neuron hyperactivity and social memory impairments. Notably, REM-sleep-specific activation of the PVN-PrL pathway or intranasal OXT restores inhibitory balance and rescues social memory deficits in SD mice. Our results reveal how OXT modulates inhibitory balance in the PrL microcircuit to support social memory consolidation during REM sleep, suggesting potential therapeutic strategies for treating sleep-related memory disorders.