Land cover change has posed significant concerns to biodiversity and climate change in Bangladesh and globally. Despite the country’s designation of forest regions as protected areas to conserve their valuable resources, deforestation and forest conversion remained unabated. Fashiakhali Wildlife Sanctuary (FKWS), a protected area in the Chittagong Hill Tracts, and its surrounding forested impact area have experienced considerable changes over the years, yet are deficient in extensive assessment. This study evaluated the land use land cover (LULC) changes in the FKWS impact area over almost 3 decades (1994–2021) using multispectral remotely sensed data. The Landsat images of 1994, 2001, 2010, and 2021 were classified using a maximum likelihood algorithm and analyzed for change detection. The comparative potential of vegetation indices, including Normalized Difference Vegetation Index (NDVI) and Soil Adjusted Vegetation Index (SAVI), in forest cover assessment, and the relationship between Land Surface Temperature (LST) and NDVI was also assessed. A significant forest cover loss of around 1117.17 ha (16%) was recorded in the FKWS impact area between 1994 and 2021, with the hugest proportion of 867.78 ha (12.24%) deforested in the first period (1994–2001). Agricultural land also declined by 593.73 ha (8.37%) within the entire period, despite its initial increase of 392.04 ha (5.53%) between 2001 and 2010, being the primary driver of earlier deforestation. However, in the recent decade (2010–2021), settlement expansion of 963.90 ha (13.59%) due to massive human migration in the area contributed to the most remarkable overall land cover change of 1731.51 ha (24.42%). Furthermore, NDVI provided a better and more accurate forest cover assessment than SAVI and was recommended to aid in the quick evaluation and monitoring of the future impacts of agriculture, settlement, and other sorts of land use on the forest cover. In tandem with the widely acknowledged issue of increased temperature due to climate change, an absolute negative correlation was found between the NDVI and LST, confirming the negative impact of climate change on forest loss in the FKWS impact area.