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In this study, paper mill wastewater and hemicellulose hydrolysate were evaluated as low-cost substrates for fungal chitosan production using Penicillium citrinum. Submerged fermentation was first studied using a bioreactor operated under batch, fed-batch and continuous modes with paper mill wastewater as the substrate. Very high removal (91%) of organics as chemical oxygen demand (COD) in the wastewater with 160 mg L-1 chitosan production by P. citrinum was obtained using the bioreactor operated under fed-batch mode for 72 h. Moreover, 86% reduction of phenolics in the wastewater with 89% decolourization efficiency was achieved in the fed-batch experiments with the bioreactor. Under the continuous mode of operation with the bioreactor, maximum chitosan production of 170 mg L-1 was observed. The effect of acetic acid addition to the wastewater for enhancing chitosan production by the fungus was further studied in a batch system. Chitosan productivity of 2.33 mg L-1 h-1 was obtained with 50 mg/L acetic acid. Various models, viz. Monod, Haldane, Andrews, Webb and Yano, were fitted to the experimental data for understanding the kinetics involved in the process. Haldane model accurately fitted the experimental data on biomass specific growth rate, acetic acid consumption rate and chitosan production rate by P. citrinum with acetic acid addition to the wastewater. Fungal fermentation of another low-cost substrate, rice straw hydrolysate, was further studied using the batch-operated bioreactor; and a maximum chitosan titre of 911 mg L−1 was achieved using the detoxified rice straw hydrolysate. Highlights Low-cost substrates for chitosan production by Penicillium citrinum are reported Acetic acid addition to paper mill wastewater enhances chitosan production Biomass growth and chitosan production follow substrate inhibition kinetics Fed-batch -operated bioreactor resulted in 91% wastewater treatment efficiency Maximum chitosan titre of 911 mg L−1 was achieved with rice straw hydrolysate [ABSTRACT FROM AUTHOR]