Carbon dots (CDs) are carbon-based nanomaterials that have garnered immense interest due to their exceptional photophysical and optoelectronic properties. They have been employed extensively for biomedical imaging and phototherapy due to their superb water dispersibility, low toxicity, outstanding biocompatibility, and exceptional tissue permeability. This review summarizes the luminescence mechanism of CDs. The modification in CDs via various doping routes is comprehensively reviewed, and the effect of such alterations on their photophysical properties, such as photoluminescence (PL), absorbance, and reactive oxygen species generation ability, is also highlighted. This review also aims to summarize the role of CDs in cellular imaging and fluorescence lifetime imaging for cellular metabolism. Subsequently, recent advancements and the future prospects of CDs as nanotheranostic agents have been discussed. Herein, we have discussed the role of CDs in photothermal, photodynamic, and synergistic therapy of anticancer, antiviral, and antibacterial applications. The overall summary of the review highlights the future prospects of CD-based research in bioimaging and biomedicine.