Materials exhibiting exceptional saturable absorption performance and etching compatibility are significant in the context of advanced optical devices. Our study demonstrates that plasma etching can effectively promote the saturable absorption of BiOI nanosheets because of defect formation. Remarkably, the BiOI nanosheet subjected to the optimized H2/Ar-plasma treatment manifests a substantial nonlinear absorption coefficient (βeff) of (−5.5 ± 0.7) × 103 cm GW−1 under laser excitation at 800 nm, while the pristine BiOI sample exhibits no discernible nonlinear optical response. The βeff of plasma-treated BiOI samples is (−4.2 ± 0.9) × 103 cm GW−1 at 515 nm, surpassing that of the untreated counterpart by more than fourfold. A comprehensive structural and spectroscopic analysis indicates that oxygen vacancies serve to increase the density of in-gap states, thereby narrowing the bandgap of the BiOI. This reduced bandgap effectively facilitates the Pauli-blocking effect and, in turn, augments the saturable absorption properties of the samples. In contrast to oxygen vacancies, iodine vacancies make a negligible contribution to the performance enhancement of BiOI. Our result would provide a promising way to improve the nonlinear optical response of materials.