Electrospun nanofibers, as an innovative drug delivery system, provide selective, effective, and safe drug release. The present study aimed to fabricate nanofibers based on β-cyclodextrin grafted chitosan (β-CD-g-CS) macromolecules with incorporated drug via the blend electrospinning technique. The grafting of β-CD onto chitosan (CS) was confirmed by FT-IR, 1H NMR, TGA, XRD, and EDX analysis. Indomethacin was encapsulated in the β-CD-g-CS matrix as blend nanofibers using electrospinning in presence of polyvinyl alcohol (PVA). The SEM images revealed nanofibers with diameters at the nanoscale. The unique features of β-CD-g-CS/PVA as drug delivery system were investigated using indomethacin as a model drug molecule. Controlled release of indomethacin from nanofibers was studied in PBS solution by measuring the absorbance by UV–Vis spectrophotometer. The drug release profile exhibited that the rate of drug release can be tailored by polymer type and changing the drug/polymer ratio. The physicomechanical properties of the developed nanofibers were analyzed by tensile strength and water contact angle. The results demonstrated that β-CD-g-CS revealed enhanced wettability as well as favorable physicomechanical properties. In addition, the growth rate of the L929 cells on the CS and β-CD-g-CS nanofibers was not significantly inhibited and even improved cell proliferation. These findings indicated that β-CD-g-CS nanofibers could be appropriate as a smart drug delivery system for sustained release of indomethacin as an anti-inflammatory medicine in the wound healing and tissue engineering approaches in orthopedic applications.