In this work, we have meticulously tuned the carcinogenic Congo red dye to environmentally benign fluorescent carbon dots (CDs) by adopting a typical hydrothermal method without any additives. The as-synthesized CDs were extremely water soluble, exhibited an excitation wavelength independent emission with a high fluorescence quantum yield (46%) and were biocompatible. The microscopy results revealed that the CDs were quasi-spherical with a particle diameter of ∼5 nm. The structure and functional groups of the CDs were comprehensively investigated using Fourier-transform infrared, X-ray photoelectron and Raman spectroscopy analyses. These studies show that the CDs were intrinsically functionalized with -OH, N-H and CO groups. In the sensing experiments, the CDs selectively responded to Fe3+ ions over other analytes with a detection limit of 12 nM. The time-resolved fluorescence quenching measurements were used to decipher the sensing mechanism. For the onsite 'equipment-free' detection of iron, we have developed a CD adsorbed paper-based analytical tool. Furthermore, the selective nature of CDs was highly beneficial for detecting Fe3+ in non-heme metalloprotein (ferritin) and real water samples. Thus, the CDs produced from the Congo red dye could be a prospective asset to the bio-imaging and biosensing research fields.