The aim of this study is to exploit a suitable chitosan extraction method from the chitin of indigenous shrimp shells by employing different physicochemical treatments and to improve different bioactive properties of this extracted chitosan (CS) by applying gamma radiation. Chitin was prepared from shrimp shell by pretreatment (deproteination, demineralization and oxidation). Chitosan was extracted from chitin by eight different methods varying different physicochemical parameters (reagent concentration, temperature and time) and assessed with respect to the degree of deacetylation, requirement of time and reagents. The method where chitin was repeatedly treated with 121°C for 30 min with 20 M NaOH, produced the highest degree of deacetylation (DD) value (92%) as measured by potentiometric titration, with the least consumption of time and chemicals, and thus, selected as the best suitable extraction method. For further quality improvement, chitosan with highest DD value was irradiated with different doses (i.e., 5, 10, 15, 20 and 50 kGy) of gamma radiation from cobalt-60 gamma irradiator. As the radiation dose was increased, the molecular weight of the wet irradiated chitosan, as measured by the viscosimetric method, decreased from 1.16 × 105 to 1.786 × 103, 1.518 × 103, 1.134 × 103, 1.046 × 103 and 8.23 × 102 dalton, respectively. The radiation treatment of chitosan samples increased the antimicrobial activity significantly in concentration dependent manner on both gram-positive (Staphylococcus aureus) and gram-negative (Escherichia coli) bacteria, as determined by the well-diffusion method. Four to five percent wet chitosan treated with a radiation dose range of 5.0–10.0 kGy rendered the highest antimicrobial activity with least energy and time consumption. Solubility, water binding capacity (WBC) and fat binding capacity (FBC) also improved due to irradiation of chitosan.