Grand-potential based multiphase-field model is extended to include surface diffusion. Diffusion is elevated in the interface through a scalar degenerate term. In contrast to the classical Cahn-Hilliard-based formulations, the present model circumvents the related difficulties in restricting diffusion solely to the interface by combining two second-order equations, an Allen-Cahn-type equation for the phase field supplemented with an obstacle-type potential and a conservative diffusion equation for the chemical potential or composition evolution. The sharp interface limiting behavior of the model is deduced by means of asymptotic analysis. A combination of surface diffusion and finite attachment kinetics is retrieved as the governing law. Infinite attachment kinetics can be achieved through a minor modification of the model, and with a slight change in the interpretation, the same model handles the cases of pure substances and alloys. Relations between model parameters and physical properties are obtained which allow one to quantitatively interpret simulation results. An extensive study of thermal grooving is conducted to validate the model based on existing theories. The results show good agreement with the theoretical sharp-interface solutions. The obviation of fourth-order derivatives and the usage of the obstacle potential make the model computationally cost-effective.