The aim of the present study was to encapsulate linalool into chitosan nanocomposite (Nm-linalool) for developing novel controlled release delivery system in order to protect stored rice against fungal infestation, aflatoxin B1 (AFB1) contamination, and lipid peroxidation. The chitosan-linalool nanocomposite showed spherical shapes, smooth surface with monomodal distribution as revealed by SEM and AFM investigation. FTIR and XRD represented peak shifting and changes in degree of crystallinity after incorporation of linalool into chitosan nanocomposite. Nanoencapsulation of linalool showed higher zeta potential and lowered polydispersity index. TGA analysis reflected the stability of Nm-linalool with reduced weight loss at varying temperatures. Biphasic pattern, with initial rapid release followed by sustained release illustrated controlled delivery of linalool from chitosan nanocomposite, a prerequisite for shelf-life enhancement of stored food products. Chitosan nanocomposite incorporating linalool displayed prominent antifungal and antiaflatoxigenic activity during in vitro as well as in situ investigation in rice with improved antioxidant potentiality. Further, Nm-linalool displayed considerable reduction of lipid peroxidation in rice without exerting any adverse impact on organoleptic attributes. In conclusion, the investigation strengthens the application of chitosan-linalool nanocomposite as an innovative controlled nano-delivery system for its practical application as novel environmentally friendly eco-smart preservative in food and agricultural industries.