This study presents a detailed investigation into the use of β-cyclodextrin (β-CD) encapsulated iron oxide nanoparticle (β-CD@Fe3O4) composites, modified with different ligands, to activate peroxymonosulfate (PMS) for the degradation of pharmaceutical contaminants, namely, diclofenac, carbamazepine, and erythromycin. The focus is on understanding the ligand effect, particularly using citric acid (CIT), polyethyleneimine (PEI), and cetyl trimethyl ammonium bromide (CTAB), on the degradation performance of these composites. Employing density functional theory (DFT) calculations, this work examines the electronic structure and charge distributions of β-CD@Fe3O4 composites, providing insights into their interaction with various pollutants. The study reveals that the β-CD@PEI@Fe3O4 composite demonstrates superior degradation efficiency due to optimal electrostatic interactions, regardless of the pollutant’s hydrophobicity. On the other hand, β-CD@CIT@Fe3O4 shows moderate efficiency, and β-CD@CTAB@Fe3O4 exhibits selective efficiency, particularly for hydrophobic compounds. These findings underscore the significant role of surface chemistry in modulating the activation of PMS and the degradation of contaminants, opening avenues for designing tailored β-CD composites for environmental remediation.