Rice sheath blight (RSB) caused by Rhizoctonia solani AG1-IA is among the most destructive diseases threatening global rice production, causing yield losses of 20–50% under epidemic conditions. The pathogen's broad host range, prolonged sclerotial survival (8–10 years), and high genetic variability pose significant management challenges. Although the recent discovery of the SBRR1-R resistance allele represents a landmark breakthrough for breeding programmemes, the quantitative nature of resistance and pathogen adaptability necessitate integrated management approaches. Chemical fungicides raise environmental and resistance concerns, while biological control agents show inconsistent field performance in aquatic rice ecosystems. Chitosan and chitosan-based nanoparticles have emerged as promising sustainable alternatives, offering unique dual functionality: direct antifungal activity through membrane disruption and sclerotial inhibition, combined with potent elicitation of plant defence responses including activation of pathogenesis-related proteins, defence enzymes, and systemic acquired resistance. Notably, chitosan nanoparticles achieve superior efficacy at significantly lower concentrations than bulk chitosan, with studies demonstrating up to 90% disease suppression attributed to enhanced surface charge density, improved cellular uptake, and controlled release properties. This review examines RSB epidemiology, pathogen biology, and current management strategies, while providing critical analysis of chitosan sources, physicochemical properties, nanoparticle synthesis methodologies, antifungal mechanisms, and recent advances in chitosan-based nanocomposites and functionalized derivatives. We present an integrated disease management framework positioning chitosan nanotechnology alongside host resistance deployment, biological control, and cultural practices for sustainable RSB management. Future research priorities including field validation, mechanistic studies, and regulatory considerations are discussed to contribute to resilient and sustainable rice production systems.