In present work, an efficient method for the preparation of water‐soluble chitosan (CS) is reported. It is based on simple synthetic method, which is easy to handle and delivered good water solubility. This article describes the effect of various factors such as the concentration of reactants and the amount of solvents on the reactions' outcome as well as cytocompatibility of the resulting water‐soluble CS derivatives. CS derivatives with different ratios of polyethyleneimine (PEI) (80:20 (CP1), 90:20 (CP2), 95:5 (CP3), 99:1 (CP4), and 99.6:0.4 [CP5]), at optimized conditions (50 g of CS, 1 L of 0.5 M acetic acid solution at 80°C for 24 h) were synthesized. It was noted that the amount of PEI was critical for the cytocompatibility, decreasing the amount of PEI led to increasing the cytocompatibility of the obtained water soluble CS derivatives. To show the biomedical and drug delivery applications of the newly synthesized CS derivative, this was used to prepare membranes by freeze‐drying and was loaded with thyroxine, respectively. The angiogenic potential of the thyroxine loaded membranes was tested in chorio allantoic membrane assay, which showed good level of neovascularization. For wound healing studies full thickness wounds rat model was used and thyroxine loaded hydrogels showed complete wound healing at day 23.