The biophysical properties of DNA-modified Au nanoparticles (AuNPs) have attracted a great deal of research interest for various applications in biosensing. AuNPs have strong binding capability to the phosphate and sugar groups in DNA, rendering unique physicochemical properties for detection of metal ions. The formation of Au–DNA nanocomposites is evident from the observed changes in the optical absorption, plasmon band, zeta potential, DLS particle size distribution, as well as TEM and AFM surface morphology analysis. Circular dichroism studies also revealed that DNA-functionalized AuNP binding caused a conformational change in the DNA structure. Due to the size and shape dependent plasmonic interactions of AuNPs (33–78 nm) with DNA, the resultant Au–DNA nanocomposites (NCs) exhibit superior fluorescence emission due to chemical binding with Ca2+, Fe2+ and Mg2+ ions. A significant increase in fluorescence emission (λex = 260 nm) of Au–DNA NCs was observed after selectively binding with Mg2+ ions (20–800 ppm) in an aqueous solution where a minimum of 100 ppm Mg2+ ions was detected based on the linearity of concentration versus fluorescence intensity curve (λem = 400 nm). The effectiveness of Au–DNA nanocomposites was further verified by comparing the known concentration (50–120 ppm) of Mg2+ ions in synthetic tap water and a real life sample of Gelusil (300–360 ppm Mg2+), a widely used antacid medicine. Therefore, this method could be a sensitive tool for the estimation of water hardness after careful preparation of a suitably designed Au–DNA nanostructure.