Synthesizing nano carbon from its bulk precursors is of recent research interest. In this report, luminescent carbon nanoparticles (CNPs) with tunable particle size and surface functionality are fabricated from lignite using ethylenediamine as the reactive solvent and surface passivating agent via different experimental methods. From the steady-state and time-resolved photophysical studies of these differently sized CNPs, it is unveiled that the energy of the excitons generated after photoexcitation is quantum confined, and it influences the observed photophysical behaviour significantly only when the particle size is less than 10 nm. A larger size of the CNPs and less surface functionalization lead to aggregation, and quenching of the fluorescence. But by dispersing smaller size CNPs in sodium sulfate matrix exhibits fluorescence in the solid state with an absolute fluorescence quantum yield of ∼34%. The prospective application of this hybrid material in sensing and removal of moisture in the atmosphere is illustrated.