The present study deals with encapsulation of Myristica fragrans essential oil (MFEO) into chitosan nano-matrix, their characterization and assessment of antimicrobial activity, aflatoxin inhibitory potential, safety profiling and in situ efficacy in stored rice as environment friendly effective preservative to control the postharvest losses of food commodities under storage. Surface morphology of MFEO-chitosan nanoemulsion as well as encapsulation of MFEO was confirmed through SEM, FTIR and XRD analysis. In vitro release characteristics with biphasic burst explained controlled volatilization from nanoencapsulated MFEO. Unencapsulated MFEO exhibited fungitoxicity against 15 food borne molds and inhibited aflatoxin B1 secretion by toxigenic Aspergillus flavus LHP R14 strain. In contrast, nanoencapsulated MFEO showed better fungitoxicity and inhibitory effect on aflatoxin biosynthesis at lower doses. In situ efficacy of unencapsulated and nanoencapsulated MFEO on stored rice seeds exhibited effective protection against fungal infestation, aflatoxin B1 contamination, and lipid peroxidation. Both the unencapsulated and nanoencapsulated MFEO did not affect the germination of stored rice seeds confirming non-phytotoxic nature. In addition, negligible mammalian toxicity of unencapsulated MFEO (LD50 = 14,289.32 μL/kg body weight) and MFEO loaded chitosan nanoemulsion (LD50 = 9231.89 μL/kg body weight) as revealed through favorable safety profile recommend the industrial significance of nanoencapsulated MFEO as an effective green alternative to environmentally hazardous synthetic pesticides for protection of food commodities during storage.