The present investigation describes the preparation of chitosan/2-hydroxy-5-(4-nitrophenylazo)-benzaldehyde (CHNAB) and chitosan/2-hydroxy-5-(4-tolylazo)-benzaldehyde (CHMAB) derivatives (in 4 : 5 molar ratio) under mild conditions. These derivatives were synthesized by 79% and ≤90% deacetylated chitosan in an isopropyl alcohol/water mixture and dimethyl sulfoxide. The thermal properties of the derivatives were examined by differential scanning calorimetry (DSC) and thermogravimetric analysis (TGA). CHNAB shows an endothermic peak at 212 °C and exothermic peak at 231 °C due to phase change for cis–trans isomerisation, whereas, in CHMAB, only the endothermic peak at 222 °C is seen due to the absence of cis–trans isomerisation. Toxicity has been reduced in chitosan based azo derivatives, as compared to the corresponding azo compounds, as seen by the antibacterial results where S. aureus (Gram positive) shows ZOI 26 mm for CHNAB and 38 mm for CHMAB. The transmitted signal intensity induced by the birefringence as shown by CHNAB as πdΔn/λ is much less than 1. The transmitted signal is effectively proportional to (Δn)² because of the nitro group behaving like an auxochrome. The study on the optical birefringence properties of the azo-based chitosan derivatives indicates that the prepared derivatives may be used as bio-optical devices for biomedical applications.