The textile industry has long been a cornerstone of the global economy, but its environmental impact has come under scrutiny, particularly with the rise of fast fashion driven by rapid population growth and short-term trends. The industry's current linear economy model, which prioritizes constant production and disposal, exacerbates its environmental footprint. To address these issues, a circular economy (CE) model has emerged, emphasizing the principles of “reduce, reuse, and recycle” to extend product life cycles, transform waste into wealth such as recycled yarn, regenerated fibers, biofilms, biodegradable composites, biofuels and so on, and minimize environmental impact. Implementation of CE in the textile industry aligns with the UN's sustainable development goals, as CE aims to minimize water, resources, and energy consumption, accelerate economic growth, and promote responsible consumption and production. This article explores how transitioning to a CE model could mitigate the industry's environmental damage while influencing economic growth. Furthermore, how internet of things (IoT) (Internet of things) can be contributed to CE initiatives by providing a transparent traceability along the whole textile supply chain. The review begins by examining the drawbacks of the linear economy and then highlights the environmental and economic benefits of CE. The discussion includes waste management strategies, with a special focus on recycling techniques not only in the end products but also across various process sections of the textile industry, promoting a sustainable development and application of recycled fiber. Additionally, it explores approaches like resale, reuse, repurposing, and rental. Furthermore, the paper addresses the economic and environmental benefits from circular economy principles adaptation supported by industry-specific data. This paper shows the connection of sustainable development goals (SDGs) with circular economy, effects of consumer behavior in CE and potential risks associated with adopting a circular economy model, which are crucial for its successful implementation.