Two-dimensional (2D) transition metal carbides, nitrides, and carbonitrides (MXenes) have drawn a lot of attention because of their unique physicochemical properties. Recent experimental and theoretical findings reveal that water intercalation in MXene results in surface reconstruction and hydrolysis. In the current study, we investigated the electronic and optical characteristics of the water-intercalated Ti₃C₂O₂ MXene using first-principles quantum simulations via density functional theory (DFT) and time-dependent density functional theory (TD-DFT). We show that water intercalation impacts the electronic states close to the Fermi level, which has a considerable effect on the electronic and optical properties of Ti₃C₂O₂ MXene. Importantly, we linked hydrolysis with the changes in the HOMO and LUMO states and with the optical properties. The findings in this study contribute to a better understanding of the photo-response of the water-intercalated MXene.