The textile industry is a growing sector worldwide and has immense opportunity in terms of providing employment and boosting a nation’s economy. However, there exist severe environmental risks associated with textile effluents that impact the surrounding ecosystem. This review offers an approach for sustainable water management using phycoremediation to treat dye-laden wastewater and recover bio-based pigments from the residual biomass. Microalgae such as Chlorella, Scenedesmus, Phormidium, and macroalgae like Sargassum, Enteromorpha, and Codium has been extensively used in several phycoremediation-based studies, and their residual biomass could be a potent source for extraction of bio-based pigments. This review also recommends studies involving the algal-bacterial consortia approach for treating dye-laden wastewater as an alternative to conventional, biobased methods. The outcome of this study will provide policymakers and researchers with new insight to manage water and wastewater resources sustainably. Furthermore, this review also enhances our understanding of nature-based decontamination approaches for treating dye-laden wastewater through algal-based technologies.