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The present study aims to develop a novel waterborne chitosan‐based coating formulation for slow‐release urea fertilizer. Coating formulations were elaborated by blending chitosan (Cs) and polyvinyl alcohol (PVA) (50/50, wt/wt) followed by the addition of lignin nanoparticles (LNPs) at various loadings (1, 2, 3, and 5 wt% LNPs) to yield viscous coating formulations. Formulations were cast to obtain coating films on which several structural, thermal, morphological, mechanical, and physicochemical characterizations were performed. Results showed that the Cs/PVA‐LNPs (3%) formulation exhibited suitable physicochemical characteristics in terms of the hydrophobic–hydrophilic balance, reduced water vapor permeability, and tolerated elasticity making it suitable to be used for fertilizer coating. Urea granules were coated by Cs/PVA and Cs/PVA‐LNPs formulations under controlled spraying and drying conditions until a good adhesion between the fertilizer and coating was obtained. Coated granules showed a good slow‐release N property over time and results indicated that the incorporation of LNPs was beneficial since its prolonged the longevity of the coated urea fertilizer up to 18 days compared to 5 days for the neat Cs/PVA. Hence, the proposed nanocomposite system showed great potential to be used as a coating material to produce a new slow‐release N fertilizer for sustainable crop production.