Chitosan, a naturally abundant and biodegradable biopolymer derived from chitin found in crustacean shells, has emerged as a promising material for addressing environmental challenges. Its reactive amino and hydroxyl groups enable diverse interaction mechanisms. This makes it effective for removing heavy metals, dyes, pharmaceuticals, and other contaminants from water. However, the limitations of native chitosan, such as poor solubility and mechanical strength, necessitate strategic modifications. This review comprehensively examines recent advances in chitosan derivatives and composites. It focuses on modern modification strategies, such as chemical, physical, and composite formation, that enhance stability, selectivity, and efficiency. It explores the design principles of high-performance composites. It also details the multifaceted mechanisms of pollutant removal, including adsorption, catalysis, membrane filtration, and flocculation. Critical practical challenges are critically assessed. These include scalability, regeneration, lifecycle sustainability, and real-world implementation. Furthermore, emerging trends are highlighted. These integrate circular economy principles, seafood waste valorization, and digital optimization through the use of artificial intelligence. By consolidating current knowledge, this review aims to bridge the gap between laboratory innovations and large-scale environmental applications. It guides the development of intelligent, scalable, and ecologically responsible solutions based on this remarkable biopolymer.