The study focuses on the conversion of crop residues into thermal insulation materials, to gain better utility with value addition. Such applications will divert the paddy straw to useful purposes, leading to reduction in the open field burning of paddy straw in various developing countries. The process was optimized for manufacturing of insulating block composite and evaluating the mechanical and thermal performance of the same. Properties like compressive strength, internal bonding strength, density, porosity, and thermal conductivity were studied for the block. The optimum physical and mechanical properties were observed as moisture content 8–10 %, a block density 450–500 kg/m3, porosity 70 % with particle size of 8–15 mm. The mixture ratio of block was optimized as paddy straw 574.9 g, clay 840 g, and seed lac 260 g with thermal conductivity, compressive strength, bonding strength, and porosity as 0.08 W/m K, 1.19 MPa, 0.028 MPa, and 70.7 %, respectively, using Response Surface Methodology. An eco-friendly, economical and sustainable technological value addition for paddy straw was obtained and used for insulation purposes in cold storages as well as drying chambers. Paddy straw insulating block can also be utilized in combination with conventional insulation materials.