Among the biopolymers, chitin and its derivative chitosan (CTS) have been receiving increasing attention. Both are composed of randomly distributed β-(1-4)-linked d-glucosamine and N-acetyl glucosamine units. On commercial scale, CTS is mainly obtained from the crustacean shells. The chemical methods employed for extraction of CTS from crustacean shells are laden with many disadvantages. Waste fungal biomass represents a potential biological source of CTS, in fact with superior physico-chemical properties, such as high degree of deacetylation, low molecular weight, devoid of protein contamination and high bioactivity. Researchers around the globe are attempting to commercialize CTS production and extraction from fungal sources. Fungi are promising and environmentally benign source of CTS and they have the potential to completely replace crustacean-derived CTS. Waste fungal biomass resulting from various pharmaceutical and biotechnological industries is grown on inexpensive agro-industrial wastes and its by-products are a rich and inexpensive source of CTS. CTS is emerging as an important natural polymer having broad range of applications in different fields. In this context, the present review discusses the potential sources of CTS and their advantages and disadvantages. This review also deals with potential applications of CTS in different fields. Finally, the various attributes of CTS sought in different applications are discussed.